1) How long is Escrow?
The correct answer is it can be as long or short as the buyer and seller want it to be. However a long escrow timeframe can cause an escrow to fail, because it can create a situation where the buyer no longer qualifies for the mortgage. Just because the buyer qualified when the offer was submitted, doesn’t mean the buyer will continue to qualify on the day the lender is supposed to fund the loan so the escrow can close.
A lender assumes a given interest rate when they qualify the buyer. If that interest rate is different for the reasons detailed below, at time of close, the buyer may not qualify at that changed interest rate.
2) Why do most agents write a contract to close in 30 days or less?
Dan Green of The Mortgage Reports wrote a post today explaining why a shorter escrow timeframe equals a lower mortgage interest rate. His post explains that a 60 day lock “costs more” than a 30 day lock, often in terms of higher interest rate vs. higher cash costs to close.
In order for the buyer to get the rate they think they are getting, they have to be able to lock that rate for no longer than 30 days. While the buyer is not required to lock that rate, it should at least be a possibility. If a buyer looks at a rate quote of 5%, they often are not told that assumes a rate lock period of no more than 30 days. So if they sign a contract to close in 60 days, and then try to lock the rate in the first week of their contract, they will find the rate to do that is higher than the rate they were quoted the day they made the offer.
The rate can change in a few hours without the issues noted in this post. But even if the rate does not change at all, the rate will be higher if you try to lock it through a 60 day closing vs. a 30 day closing.
The honest lender who asks “what is your proposed closing date” and gives you a “60 day lock rate quote” will be higher than the lender who assumes a 30 day lock. Be sure the lenders are using the same parameters when quoting you a rate prior to making an offer, so that you are comparing apples to apples. In this scenario the most trustworthy lender could appear to have a higher rate, when they are being most honest about the potential for rate if you lock for 60 vs. 30 days.
3) How does the closing date timeframe, chosen at time of offer AND ACCEPTANCE, impact the buyer and seller in other ways?
Buyer A gets a pre-approval letter the day they are submitting an offer. The lender pre-approves the buyer for a $300,000 mortgage at 5%.
Seller B accepts the buyer’s offer BUT asks for a 90 day closing, as the home they are moving to is new construction, and won’t be completed for 90 days.
Buyer A accepts the seller’s counter-offer as to closing date.
30 days later the buyer sees interest rates rising and wants to lock the rate. The lender quotes the “lock rate” and the buyer is confused. “I see the rate on your website is 5%. Why are you quoting me 5.25%?” Lender explains that a 60 day lock vs. a 30 day lock adds 1/4 of a % point to the mortgage interest rate.
Here’s where it gets REALLY complicated…if the buyer doesn’t qualify to buy the house if the rate is 5.25% vs. 5%, he can’t lock it. If he chooses to wait until the closing is within 30 days before he locks the rate, the rate could be at 5.5% at that time. If the timeframe for the finance contingency protecting the buyer’s Earnest Money expires prior to that time (and almost all do), the buyer is painted into a corner by circumstance.
Moral of the story is often a buyer CAN let the seller have 90 days to close if they are renting month to month. But a buyer must consider the impact of the interest rate floating out for 60 of those 90 days and/or the cost of locking for more than 30 days at time of contract.
Today, it is near impossible for a seller to stay in the property for more than 60 days from time of offer and acceptance. You can close in 30 days and let the seller stay or rent back from the buyer. BUT the buyer’s lender will not allow that seller to rent bank for an extended period. If the buyer is qualifying at an “owner occupied” interest rate, they will impose a maximum number of days that the buyer can rent it to the seller. Beyond that time period the buyer’s lender will consider it an “investment” mortgage, and higher investor interest rate and higher downpayment requirements, vs. an “owner occupied” purchase money loan.
The “ifs, ands or buts” that happen in a split second during negotiations, can change the “assumptions” made at the time the buyer received their preapproval letter. The lender is often not “in the room” while these negotiations take place, or consulted for every tiny change in close date or rent back terms. They most often don’t see those “changes” until the buyer and seller both sign the contract as finally negotiated.
These small changes can put the buyer’s Earnest Money “at risk” of loss. The agent is the “protector of the buyer’s Earnest Money”, as related to changes in contract terms during negotiations. Yet how many realize the changed position the buyer is put in when the seller counters for a longer close date?
We see thousands of articles on “How to choose an agent?” Perhaps asking the agent “what happens if the seller wants to close in 90 days, or wants to rent back for 90 days?”, is a better question than “How many homes have you ‘sold’ this year?” The cost of closing is VERY important to the buyer. Not closing at all, due to changes no one played out to the likely eventual worst case scenario, affects both the buyer AND the seller.
Agents don’t “sell” houses. Agents represent the buyer OR the seller AND the transaction as a whole, as it appears at time of offer…AND as it changes during negotiations and escrow.
Handing a contract to escrow and waiting for a commission check is no longer an option. Changes in lending BACK TO the old tried and true rules of the game, requires agents to be on their toes all the way to the day escrow closes…or doesn’t close.
Why are so many escrows not closing these days? Everyone asks that question. Truth is the skills needed by an agent have changed dramatically back to old school…and agents still think “it’s the lender’s job” vs. theirs.
Lending is such a critical component. If someone said that the loan officer is the most important piece of the sale puzzle, it would be hard to argue against that (even loan processors should be in that same category).
Great post, Ardell. For the record, I’m quoting 45 day locks here at RCG which is what I would use for anything closing 30-38 days. I’d much rather have that cushion of a few extra days–especially since extensions have become more expensive with most of the lenders I work with.
Hardly anyone is truly closing 30 days from start to finish. If buyers are truly pre-approved, closings can take place much quicker. However, we know that is a very small percentage of buyers.
IMHO, agents writing 30 day contracts are being pretty clueless as to what it takes to get to the closing table thesedays. HVCC alone could add or week or two just to get the appraisal. Then you have to get the loan through underwriting.
The best thing all parties could do right now is stop setting quick and hard time lines. Listing agents need to get sellers to not schedule their purchases on the same day as the sale. Borrower shouldn’t be depending on closing on a specific day, but allow some flexibility.
Russ,
1) Rarely does a seller buy on the same day on the West Coast vs. East Coast. The norm is a 3 day post occupancy allowing 3 days for the seller to close on their new home.
2) The agent has to consider the negotiating factor of a quick close date. Putting a longer time in the contract could hurt the buyer…and an extension (if needed) if the property is already vacant is usually better for the buyer than a long close date in the offer.
While what you are saying makes sense from a lending process standpoint, the agent must consider the impact of giving the lender plenty of time on the buyer’s negotiations. Timing is everything and a short close date often gets a better price negotiation. So how long it takes may not be the primary consideration.
PLUS I have tried using a longer close date and it didn’t help as the lender stacked their files by close date and the extra time did not negate the recent delays in processing. So hurting the buyer unnecessarily is not a good idea and clearly not the way an agent needs to proceed.
It really boils down to the transaction. We’re closing an FHA purchase about 25 days from start of application to finish. The buyers are very qualified and quickly provided everything. The agents were kind in writing the FHA transaction w/a 45 day or sooner closing… I’m actually surprised to see this close so soon. [Don’t tell my processor I said this–she’ll hunt me down and slap me].
In addition to having super buyers and agents on this transaction (and a vacant home) everyone understood that we were shooting for quicker than 30 days…but…
HVCC can throw a real monkey (almost typed money) wrench into a 30 day closing. We’re trying to get appraisals ordered as quickly as possible “just in case”…this requires inspections to be done ASAP and borrowers to provide deposits (if required).
30-45 day closings, in our area, I think is reasonable for purchases.
Rhonda and Russ,
I also think having a full and REAL pre-approval with all documents at lender prior to offer is helpful for a short close situation.
I’ve never been a RE Agent…but I cannot imagine not having a strong preapproval letter with the offer.
Do I look like Caspar the Friendly Ghost in my avatar to everyone else, or is it my computer only doing that?
I’m seeing your avatar that I’ve always seen. Is Kim messing with you? š
I have just been trying to get agents to properly set expectations. I understand that offering short closes can help in negotiations, but the issue is whether we can actually get it closed in that timeframe. I just think agents should be having frank discussions with sellers and buyers about the realities of the market place and that lending takes time and to expect a few bumps in the road.
Everything is being scrutinized more than ever, appraisals are being challenged… nothing is easy.
I see Casper…great post.
Interesting. Rhonda sees me and me and wk91 see Casper. Odd defect in the avatars and inconsistent. I’ll check it out on other computers.
wk91 – thanks for the kudos on the post. Very important stuff in this market.
Right now…I don’t see you or me…we’re both “caspers” or FB faceless profiles.
The new MDIA (mortgage disclosure improvement act) may cause delays in transactions: http://www.respalawyer.com/2009/07/mortgage_disclosure_improvemen.html
Pingback: Mortgage Disclosure Improvement Act: New Waiting Periods on Mortgage Transactions | Seattle Real Estate | Rain City Guide
Ardell,
My understanding of the financing contingency – and that of my broker and company – is that earnest money is due the seller unless the buyer has waived the contingency and the property fails to close due to financing within the timeframe specified in the financing contingency.
The 30 days default is the deadline for the buyer to get the loan commitment letter to the seller AND to waive financing. If by the end of the 30 days the buyer doesn’t waive the contingency and the seller doesn’t exercise her right to terminate unless the buyer waives it, then the deal proceeds forward. If at, let’s say, day 50, the buyer cannot obtain financing but has neither had a request to waive the contingency from the seller nor has the seller already waived the contingency themselves, then my understanding is that earnest money goes back to the buyer. Paragraph 5 of the contingency says that if the buyer has made a good faith effort to obtain financing and hasn’t waived the contingency, then the earnest money returns to the buyer.
I just happened upon your article here, but I was wondering if perhaps there is something here that my brokers have missed.
Nevertheless, the other problems with the longer closing date, such as the rate lock and such, are totally spot on. In my experience, the most common problem with extended closings (especially in short sales and the like), is the interest rate and loan terms.
Art
Ardell,
My understanding of the financing contingency – and that of my broker and company – is that earnest money is due the seller unless the buyer has waived the contingency and the property fails to close due to financing within the timeframe specified in the financing contingency.
The 30 days default is the deadline for the buyer to get the loan commitment letter to the seller AND to waive financing. If by the end of the 30 days the buyer doesn’t waive the contingency and the seller doesn’t exercise her right to terminate unless the buyer waives it, then the deal proceeds forward. If at, let’s say, day 50, the buyer cannot obtain financing but has neither had a request to waive the contingency from the seller nor has the seller already waived the contingency themselves, then my understanding is that earnest money goes back to the buyer. Paragraph 5 of the contingency says that if the buyer has made a good faith effort to obtain financing and hasn’t waived the contingency, then the earnest money returns to the buyer.
I just happened upon your article here, but I was wondering if perhaps there is something here that my brokers have missed.
Nevertheless, the other problems with the longer closing date, such as the rate lock and such, are totally spot on. In my experience, the most common problem with extended closings (especially in short sales and the like), is the interest rate and loan terms.
Art
“My understanding of the financing contingency ā and that of my broker and company ā is that earnest money is due the seller unless the buyer has waived the contingency and the property fails to close due to financing within the timeframe specified in the financing contingency. ”
Sorry, correction please. I should have written “if” instead of “unless”
Art
Art,
Sorry I missed this back when…I took a short trip to Portland and am still catching up on “stuff” as a result.
Why would a buyer ever “waive” the finance contingency? You lost me there. Whatever would compel a buyer to sign a waiver like that while in escrow?
If my assumption that a buyer would not sign such a waiver is correct, I think that negates your question, unless I’m not “getting” your point. If so, try again please.