Standard loan-contingency clause can help both buyers and sellers
Savvy home buyers always include a loan-contingency clause in their offer. The provision can benefit the seller, too.
Q. We have had our home on the market for three months, and finally received an offer last week. The price that the buyer is offering is fine with us, but the contract includes a "loan contingency" clause that says the buyer can cancel the deal if he cannot get a mortgage. This is the first time we have sold a home. Is this type of contingency typical in a real estate deal, or is it some sort of scam?
A. No, it's no scam. Smart buyers have always included a loan-contingency provision in their written offers, and it's even more important for them to do so today, because banks have tightened their mortgage requirements in the past year and are no longer willing to approve virtually every application they receive.
A loan-contingency clause states that the offer is contingent upon the buyer's ability to obtain a mortgage in order to complete the transaction. If the buyer can't get the needed financing, the contingency allows him or her to cancel the transaction and get his or her deposit back.
Most preprinted offer forms today contain a standard loan-contingency clause, including a couple of blank spaces to provide more details.
Savvy buyers fill in all the blanks. If, say, the purchaser needs a $150,000 loan to close the deal, the contingency should say so. That way, he or she can get the deposit back if the bank is willing to lend only $130,000 or $140,000 and the buyer doesn't have the resources to make up for the difference.
The contingency also should state the maximum interest rate that the buyer will agree to pay. If the buyer states in the contract that the deal is based on receiving a 6 percent fixed rate but the bank wants 7 percent, the buyer can again back out of the deal and get the deposit back.
Such a contingency may seem unfair to home sellers like you, but it's really not. You certainly don't want to enter a sale transaction with a potential buyer and then, weeks or months later, find out that the buyer can't qualify for a mortgage, thus forcing you to put your home back on the market and return the deposit.
Q. What is a termite shield?
A. It's a wrapping made of nonrusting metal, used to cover a home's foundation, walls or pipes to protect against termites and other common pests.
Q. Our water heater finally gave out, so now we are looking for a new one. We've heard a lot about "tankless" heaters, but we don't know how they work. Can you explain?
A. Sure. Tankless water heaters, sometimes called "continuous" or "on-demand" heaters, typically are much smaller than traditional heaters. They heat the water only when the hot-water tap is turned on.
That's different from a standard unit, which uses gas or electricity to heat and reheat the water all day, even though most of us use hot water only two or three hours daily. Though tankless heaters can cost more than traditional ones, they can save a typical family that uses about 40 gallons of hot water each day about $200 per year by lowering their utility bills, according to the U.S. Department of Energy.
Many local utilities also offer rebates of between $50 and $300 to buyers who swap their conventional unit for a tankless one, increasing their savings even more.
Despite such savings, tankless heaters aren't for everyone. For example, the unit won't work properly if the home's water pressure is too low. And even if the water flow is sufficient, owners of unusually large houses - or those who often perform three or four chores that require hot water at the same time - may need to install a second or even third tankless unit to ensure that their faucets, showers and appliances get the proper amount of heat.
You can get more information about tankless water heaters by contacting your local utility company, by calling the Energy Department's toll-free consumer hotline, (800) 342-5363, or by visiting the agency's Web site at energy.gov.
• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.
© 2009, Cowles Syndicate Inc.