Chapter 20 — Exercises

The Purchase Transaction: The Contract, Contingencies, Earnest Money, and the LO's Role in the Deal

Forty items, graduated. Work them in order. Items marked † have worked solutions in the answers appendix. No answers appear in this file.

Throughout, remember the chapter's governing constraint: you are not a party to the purchase contract, you never sign it, and you may not advise on its terms. Several items below are designed to tempt you across that line. Crossing it is the wrong answer even when the reasoning is otherwise excellent.

Where an item asks for a contribution limit, a state-law rule, or a form's mechanics, the correct answer names the structure and the authority you would check — never a remembered number.

A. Recall and definitions

20.1 Define purchase agreement, earnest money deposit, and contingency in one sentence each, without using the word "contract" in more than one of the three.

20.2 The chapter says the earnest money "was never gone; it was applied." Explain what that means in terms of where the \$5,000 appears on the Linden Street file, and name the day on which a borrower is most likely to become confused about it.

20.3 Distinguish the two meanings of escrow used in mortgage lending. Then write a two-sentence explanation you could give a borrower on day 5, and name the neutral parties who commonly hold a deposit.

20.4 List the five questions a loan officer reads a purchase agreement to answer.

20.5 † Name the seven components of a financing contingency identified in §20.4, and state, for each, one specific way it can affect the loan file.

20.6 What is an interested party? Name four categories of interested party besides the seller.

20.7 State the base to which an interested-party contribution cap is applied. Why is it that base and not the loan amount? Give one consequence of the answer that shows up on the day a low appraisal arrives.

20.8 Define contract amendment. Who is capable of making one, who is not, and on which of the documents discussed in this chapter does a loan officer's signature ever appear?

B. Reading the contract

20.9 † Read this contract and list every date that governs your file. Below is a constructed excerpt from an executed purchase agreement. Produce a table with three columns: the deadline, the day number it falls on, and what the loan must have accomplished by then. Then answer the four questions beneath it.

EXCERPT — EXECUTED PURCHASE AGREEMENT               [constructed teaching example]
  Section headings shown by function. Real forms number and word these differently.

  EFFECTIVE DATE            The date of final acceptance: March 14.

  PURCHASE PRICE            $462,000.00
  EARNEST MONEY             $9,000.00, delivered to the closing agent within
                            three business days of the Effective Date.

  FINANCING                 Buyer to obtain a conventional first mortgage of not
                            less than 90% of the Purchase Price at an interest
                            rate not to exceed 6.750%. Buyer shall make written
                            application within five days of the Effective Date.

  FINANCING DEADLINE        April 12. If Buyer has not obtained a written loan
                            commitment by this date, Buyer may terminate by
                            delivering WRITTEN NOTICE to Seller on or before this
                            date, whereupon the earnest money shall be returned.
                            Failure to deliver such notice constitutes a waiver of
                            this contingency.

  APPRAISAL                 This Agreement is contingent upon an appraisal of not
                            less than the Purchase Price, obtained on or before
                            April 5.

  INSPECTION                Buyer shall have until March 24 to complete
                            inspections and deliver any written repair request.
                            Seller shall respond within three days.

  TITLE                     Buyer shall deliver written title objections on or
                            before April 2.

  SELLER CONTRIBUTION       Seller to pay $9,500.00 toward Buyer's closing costs
                            and prepaid items.

  CLOSING                   May 2, or such earlier date as the parties agree.
  POSSESSION                Delivery of possession at 5:00 p.m. on the day
                            following Closing.

(a) How many days actually remain between the Effective Date and Closing? Show the count. (b) Identify every deadline in this excerpt that expires in silence — that is, where the buyer loses a right by doing nothing. (c) The financing section states a maximum interest rate. Your file today prices at 6.875% for this borrower's profile. What do you do, on what day, and to whom do you say it? Write the actual message. (d) Name three things in this excerpt that are none of your business, and say why. Then name two things a careless reader would skip that emphatically are your business.

20.10 Using the same excerpt, build the backward pass from the May 2 closing date. Assume your shop's appraisal turn time is running eleven days and your underwriting turn time is six. By what date must the appraisal and title be ordered? Careful: two of the contract's own deadlines bind tighter than the closing date does. Find them.

20.11 The excerpt says possession transfers the day after closing. Does that affect the loan file? Justify your answer in two sentences, then name the people you would ask to be certain.

20.12 † Find the problem. A loan officer receives an executed contract and writes this summary into the file:

CONTRACT SUMMARY                                    [constructed teaching example]
  1  PARTIES     Buyer and spouse.
  2  PROPERTY    1140 Winslow Court.
  3  PRICE       $462,000
  4  DEPOSIT     $9,000
  5  FINANCING   Conventional.
  6  MONEY       Seller paying some closing costs.
  7  DATES       Closing May 2. 49-day contract.

Identify at least six defects in this summary, ranked by how much damage each one could do. For each, state what the correct entry would have been.

20.13 A contract conveys, in addition to the real property, "the seller's tractor, currently valued by the parties at \$18,000." The price is \$462,000. Compute the tractor's share of the price, state what question this raises for the loan file, and say who you ask about it — before or after submission.

C. Earnest money and contingencies

20.14 A buyer's loan is denied on day 34. The financing deadline was day 30 and no notice was delivered. In two sentences, describe the buyer's position — without predicting the outcome. Then explain, to a first-year loan officer, why "the deadline passed" is a more dangerous sentence than "the loan was denied."

20.15 † A borrower calls you, panicking, and asks: "If this loan doesn't close, do I lose my deposit?" Write your answer verbatim. It must (a) tell them what you actually know, (b) refuse to guess about what you do not, and (c) end with a specific task assigned to a specific person.

20.16 A buyer's agent tells you their client wants to waive the financing contingency. List the five things you would want to be true about your file before you would be comfortable saying the timeline is achievable — and then state clearly what you may and may not say to the borrower about the waiver itself.

20.17 Three purchase agreement forms treat an unexercised financing contingency three different ways. Describe each, and state the consequence for an identical buyer whose loan fails on the deadline date. What does the existence of these three treatments tell you about answering a borrower's question on the subject?

D. The appraisal gap — calculation and judgment

20.18 † The shortfall rule. For each file below, compute the additional cash the buyer must produce, and state the rule you used.

Then answer: which borrower profile is most exposed to a low appraisal, and why does that run counter to most people's intuition?

20.19 On the Cypress Court file, the buyer promised nothing about appraised value and the contingency was intact. State the three contractual positions available to them on the day the \$505,000 appraisal arrived, and identify which of the three is a loan-officer decision. (Careful.)

20.20 † The appraisal-gap judgment problem. A borrower is writing an offer tonight on a \$600,000 property. They plan to put 10% down (\$60,000) and they have \$96,000 in verified liquid assets. Their agent has told them that competing offers include appraisal-gap coverage and has asked them to consider a clause reading, in substance, "Buyer shall pay the difference between the appraised value and the purchase price in cash at closing, up to \$40,000."

(a) If the appraisal comes in at \$560,000, what does the lender require in additional cash? (b) What does the clause as written appear to obligate them to pay? Why are these two numbers different, and by how much? (c) Compute their remaining liquid assets under each reading, assuming closing costs and prepaids of \$21,000. (d) At what appraised value does this borrower run out of money entirely? Show the work. (e) The borrower asks you directly: "Should I sign it?" Write your answer. Then write, separately, the analysis you would provide if they asked for it.

20.21 Explain why an appraisal-gap clause "does not bind the lender," in language a borrower who has never bought a house will understand. Then explain why borrowers so consistently believe the opposite.

20.22 A gap-coverage promise is honored and the borrower brings the additional cash. Name two distinct ways this can make the loan harder to approve than it was before the promise was made.

E. Interested-party contributions

20.23 † The IPC calculation. A primary residence, conventional financing. Contract price \$412,000. Appraised value \$405,000. Loan-to-value 90.00% (computed correctly — show which base you used). The contract provides a \$14,000 seller credit toward the buyer's closing costs and prepaids, plus a \$3,500 credit from the listing broker toward the buyer's costs. The borrower's actual closing costs and prepaids total \$16,200.

(a) What is the total interested-party contribution? Justify including or excluding each component. (b) Using an illustrative 6% cap for this occupancy and LTV tier, compute the allowance and the headroom or excess. Label the figure as illustrative and name the authority you would check. (c) Independently of the cap, is there a second test this contribution fails or passes? Compute it. (d) If the contribution is over the limit, name the two standard remedies and state what each does to the loan-to-value.

20.24 Why does a contribution cap exist at all? Answer in terms of what unlimited contributions would allow the parties to do, and connect it to one of the book's six themes.

20.25 A seller offers to pay the borrower's 3.5% minimum required investment on an FHA purchase "since it's cheaper for me than dropping the price." Respond. Your answer must be correct on the rule and useful to the agent who relayed the offer.

20.26 † Credit versus price cut. A seller will do either a \$6,000 price reduction or a \$6,000 closing-cost credit on a \$400,000 purchase with 5% down at 6.625%, borrower-paid monthly MI at a 0.58% annual factor, origination of 1% of the loan amount and a 0.500 discount point.

(a) Compute the loan amount, monthly principal and interest, and monthly MI under each option. (Use the monthly payment factor 0.00640311 per dollar of loan at 6.625% for 360 months.) (b) Compute the difference in cash required at the table, accounting for the three costs that scale with loan size. Assume eight days of prepaid interest. (c) Compute the payback period in months. (d) State which option you would put in front of a borrower with \$28,000 in total assets, and which for a borrower with \$180,000 — and be explicit about what you are and are not doing when you present it.

20.27 Distinguish a financing concession, a sales concession, and a price reduction. Give an example of each and state how each affects the value used for loan-to-value.

F. Amendments, agents, and competitive offers

20.28 For each amendment below, list every element of the loan file that must be revisited: (a) closing date moved from day 45 to day 60; (b) price reduced by \$7,500 in lieu of repairs; (c) a co-borrower removed; (d) financing changed from conventional to FHA; (e) seller credit increased from \$3,000 to \$12,000 on the Linden Street file — and for (e), test it against the illustrative allowance in §20.7 and say what you find.

20.29 † Write the memo. Your file will not make the contract's closing date. You know this on day 33. Write the message you send to the buyer's agent, copying the borrower. It must name a date you can support, state why, request the executed amendment if the parties choose to extend, and propose nothing. Keep it under 150 words.

20.30 A listing agent calls and asks four questions: (1) "Are these buyers solid?" (2) "How much do they qualify for?" (3) "Is the loan approved?" (4) "Would they move the closing to the 20th?"

(a) Answer each, assuming you hold a signed borrower authorization. One of the four is not yours to answer at all — identify it and say what you do instead. (b) Now answer the whole call again assuming no authorization is on file. Write your response in one sentence, and name the statute and the internal document that determine it.

20.31 List the seven honest levers a lender has in a competitive-offer situation, in order of value, and identify the only one that requires work before an offer exists.

20.32 † Price the escalation. A borrower with \$52,000 in verified liquid assets (of which \$6,000 is already deposited as earnest money) is escalating on a property listed at \$420,000. They intend to put 5% down. Their agent proposes an escalation clause with a ceiling of \$445,000. Estimated closing costs and prepaids are \$16,500 and there is no seller credit.

(a) Build a table showing, at contract prices of \$420,000, \$430,000, \$440,000, and \$445,000, the loan amount, the down payment, and the cash required at closing — assuming in each case that the appraisal supports the contract price. (b) Rebuild the \$445,000 row assuming the appraisal comes back at \$425,000. Use the shortfall rule. (c) At which rung does this borrower run out of money, under each assumption? (d) What do you hand them, and what do you refuse to tell them?

20.33 A builder's contract offers a \$12,000 incentive conditioned on the buyer using the builder's affiliated lender and affiliated title company. Name the statute that governs this, state what you personally do next, and say what you do not do.

G. Judgment and ethics

20.34 A buyer's agent you have closed four files with asks you to write a pre-approval letter for \$25,000 more than your file supports, "just so the listing agent takes it seriously — they'll never offer that much anyway." Write your refusal in the words you would actually use, then explain in two sentences why the request is not a small one.

20.35 A borrower who has changed their mind about a house asks you to "just deny us so we can get our deposit back." Explain what you do, what you may not do, and what regulatory machinery a genuine denial sets in motion.

20.36 A listing agent tells your buyer's agent that "offers from buyers who need contingencies aren't going to be competitive here." Identify every issue this raises, including at least one that is not about this transaction, and state what a responsible loan officer does with the information.

H. NMLS-style items

20.37 A seller agrees to pay 100% of a borrower's closing costs and prepaid items, plus \$5,000 toward the borrower's down payment, on a conventional primary-residence purchase. Which portion, if any, is impermissible, and why?

20.38 A property is under contract at \$400,000 and appraises at \$412,000. A buyer is putting 20% down. On what figure is the loan-to-value computed, and what is the loan amount?

20.39 True or false, with a one-sentence justification each: (a) A loan officer may sign a purchase agreement as an interested party. (b) A seller may pay a borrower's discount points. (c) An appraisal-gap coverage clause obligates the lender to lend against the contract price. (d) An earnest money deposit is credited to the buyer at closing. (e) The financing contingency and the appraisal contingency are the same provision.

I. Loan File extension

20.40 † The Loan File. In your Appendix C workbook, complete the Chapter 20 date table for the Linden Street file. Then:

(a) Write the number of days actually available at execution beside the closing date, and state the arithmetic. (b) Identify the three clocks running on this file and the day each one started. (c) The 30-day lock taken on day 12 expired on day 42 against a day-45 closing. State the term that should have been taken, and the date it should have been measured against. (d) Recompute the cash to close assuming the appraisal had returned at \$375,000 rather than \$385,000. Did these borrowers have it? What would their reserves have been, in months? (e) Write one paragraph, addressed to yourself, on what you would have done differently on day 5.