One of the many changes to the document that is used to purchase property in Georgia. There are many more and you need to understand how these impact the process. If you would like more information on this or other Real Estate Issues please sent me an e-mail at neal@pyes.net.

Method of Payment. 
The most significant change in the GAR Purchase and Sale Agreement was to the Method of Payment section.  Under the old version of the GAR contract, the buyer had up until the date of closing to be approved for any loan to which the agreement was subject.  This approach created numerous problems for sellers and REALTORS^� when buyers who were initially pre-qualified or approved for a loan found out shortly before closing that the loan had been denied. 

   The consequences of buyers not obtaining or losing their financing fell squarely on the shoulders of the sellers under the old contract.  This is because while the buyer received back his or her earnest money, the seller was often saddled with thousands of dollars of unrecoverable costs to pack up and move his or her home and/or purchase another property.

   In an effort to solve this problem, the GAR Forms Committee modified the financing contingency so that the buyer now has a negotiated period of time, referred to as a Financing Contingency Period, to determine if he or she has the ability to obtain the loan(s) described in the contract.  If the buyer does not have the ability to obtain the loan(s), the buyer must present to the seller a letter of loan denial (setting forth all of the reasons why the loan was denied) prior to the end of the Financing Contingency Period.  If the buyer does not provide the seller with the required letter of loan denial, the loan is deemed approved and the financing contingency is removed from the contract.

   This approach is similar to what many builder contracts already provide.  While it should improve life immensely for sellers, it will definitely create some new issues for buyers.  For example, if a lender verbally denies the loan but fails to timely provide the required letter of loan denial, the buyer is deemed to have the ability to obtain the loan.  Similarly, if the lender neither approves nor denies the loan during the Financing Contingency Period pending the receipt of additional information from the buyer, the buyer is deemed to have the ability to obtain the loan and the financing contingency is terminated.  Finally, if the lender approves the loan during the Financing Contingency Period but later denies the loan, the buyer will now be in breach of contract if the buyer fails to close on the purchase of the property.

   Clearly, the new language creates significant disincentives for buyers to pursue mortgage financing from anyone other than a reputable mortgage lender.  More than ever, buyer will need to work with lenders who deliver on their promises.  More buyers will also likely start the loan approval process before they ever sign a contract to ensure that they know whether or not they can afford a property.  Buyers are also likely to try to negotiate longer Financing Contingency Periods so that they have enough time to get letters of loan denial should that become necessary.  For that matter, a buyer can effectively give themselves the same protection they have now by having the Financing Contingency Date expire on the date of closing.  

   Smart buyers will also likely select a Due Diligence Period in Paragraph 10 of the new contract that is equal to or longer than the Financing Contingency Period.  In this way, if the buyer cannot get a needed letter of loan denial, the buyer can simply terminate the contract under the Due Diligence section of the contract.  In many respects, the buyer does not need a financing contingency at all so long as the buyer has a due diligence period of sufficient length for the buyer to arrange for financing and do all necessary inspections. 

   Under the new financing contingency, the buyer is also not required to apply for a loan within a specific time frame, or for that matter, at all.  This is because if the buyer does not produce a letter of loan denial, the buyer is deemed to have the ability to obtain the loan.

   One point which should be emphasized is that just because the buyer is denied the loan within the Financing Contingency Period, does not necessarily mean that they buyer automatically gets back his or her earnest money.  So, for example, if the basis for the loan denial is that the buyer lacks sufficient funds to close, the buyer would be in breach of the provision in the GAR contract because the buyer warranted that he or she had sufficient funds to close.  In such a situation, the buyer would not be entitled to a return of his or her earnest money.  This concept did not change from previous versions of the GAR contract.

   The other major change to the financing contingency is that the contract now includes a place for the buyer to describe both a first and second mortgage being sought by the buyer.  This change was made to reflect the growing reality that more buyers are seeking both first and second mortgages in order to purchase real property.  The buyers ability to obtain a loan is then tied to whether he can obtain all of the loans described in the contract.