Tips for Executing a Real Estate Sales Contract

When you select a new home to purchase, you will need to execute a contract of sale ( also called a Residential Contract of Purchase). To assist you to negotiate that contract with the seller, below are some important tips to help you:

  1. Earnest Money Deposit. This deposit is required to secure the terms of the contract. ( It is paragraph 4 of the standard contract form.) It is paid by you (the buyer) at time of signing the contract. The amount of the deposit is selected by the seller and is normally between $500 and $2,500. Push hard to negotiate the lower amount, making your position known well before the signing date.

However, the deposit can be applied to the down payment due at time of the closing to reduce the amount of funds you need to bring to closing.

  1. Return of the Earnest Money Deposit. If your loan application is not approved by the lender, you are entitled to return of your deposit. The contract sets a deadline date for approval from the lender. ( It is paragraph 5b. of the standard contract form.) Push hard to set the deadline date one week prior to the closing date. While this is an automatic deadline, be sure to advise the seller or its real estate agent if the loan is approved or denied by the deadline date.
  2. Costs for Application. While there are no fees for making a mortgage application, there are required costs for you in making the application. For example, you must pay for an appraisal ( about $500), and, many times, a home inspection ( about $450). This is not refundable.

( However, you can negotiate with the buyer to reimburse you for the cost of these two items at the time the loan closes. Call us for more information.)

  1. Closing Costs. You are responsible for closing costs of the mortgage transaction, which will be between 3% and 5% of the purchase price. These costs are broken into three components: Settlement expenses, such

as, title insurance premium, appraisal fee, upfront mortgage insurance premium, escrow service fee, and transfer tax. Prepaid expenses, such as, homeowners’ insurance premium ( 6 months), prepaid mortgage insurance premium ( 1 month), and prepaid mortgage interest ( until end of month.) Escrows, such as, prepaid property tax ( 1 to 6 months) and homeowners insurance ( first month).

  1. Seller Contribution. For this mortgage loan, the seller may contribute up to 6% of the sales price for the closing costs, appraisal fees and home inspection fees. (This does not include the down payment or prepaid expense items.) This following language should be included in the Real Estate Sales Contract:

“ Sellers agree to pay ( or credit) purchasers’ closing costs, appraisal fee and inspection fee up to an amount equal to _____% of the purchase price. “

Push hard to negotiate the highest percentage you can. This saves you cash. (Closing costs and prepaid items, like taxes and insurance, can run up to 5% of the sales price.)

The lender also may also contribute to closing costs in certain situations.

  1. Contributions for Down Payment: For this mortgage, you must pay at least 5% of the purchase price. ( No exceptions.) You may accept gift funds ( not loans) from family members, or in some cases, from your employer, trade union or government departments, such as state housing authorities. But the source of funds must be well documented. ( By the way, you must be able to document the 3.5% down payment money at the time of application. This may be in the form of bank statements, stock statements, or documented cash.)

( And, note well, any funds you pay out for an appraisal or home inspection can be credited to the down payment, so long as they are paid in cash ( debit card), as opposed to by credit ( credit card), and the seller must have agreed to credit the payment against the sales price. ( See above.)

  1. Selection of Settlement Agent. The settlement agent is the entity that conducts the loan closing. You have the right to select the settlement agent for this mortgage closing. (Stated in paragraph 20 of the standard contract form.) If you wish assistance in choosing the settlement agent, feel free to contact us. ( We must approve the settlement agent, which takes time. Call us for a list of pre-approved agents in Virginia.)

After executing the sales contract, be sure to contact us and send a copy of the signed agreement. Also, send us the name of the real estate agent with the phone number and email address.

Happy house hunting!

All Credits Mortgage