The new stimulus plan, passed just last week, provides an incredible tax incentive to first-time homebuyers if they purchase a home between January 1, 2009 and November 30, 2009. First-time homebuyers can claim a credit of 10% of the value of their home or $8,000, whichever is less, on either their 2008 or 2009 tax return. In other words, if you've already bought your first home in the beginning of 2009, you can claim the tax refund on your 2008 taxes; you don't even have to wait until next year. If you've already filed your 2008 taxes and want to claim the credit now, you can file an amended return.
Moreover, the definition of "first-time homebuyer" has been relaxed. For the purposes of the stimulus plan, a "first-time" homebuyer is anyone who has not owned a home in the past three years. If you qualify as a first-time homebuyer and receive the tax credit, you must live in the home for at least three years, otherwise you will have to pay back the credit.
If you are single, your income must be $75,000 or less in order to claim the full credit. For married taxpayers, income must be $150,000 or less to receive the full credit. You don't need to do anything special to obtain the credit -- just claim the credit on your tax return and file your taxes on time.
The best part is, the credit is actually refundable. In other words, if you buy a home and your outstanding tax liability at the end of the year is zero, then you will actually get an $8,000 check from the IRS in the mail (so long as the value of the home you buy is at least $80,000). If your tax liability at the end of the year is $5,000, you will get a check for $3,000 back from the IRS (again, assuming the value of your home is at least $80,000).
Unfortunately, if you bought your home in 2008, then the new stimulus plan tax credit does not apply to you. However, you may still be eligible for the $7500 credit offered to new homebuyers last year, although that was not a true credit, but rather more like an interest-free loan to be paid back over 15 years. If you bought your home in 2008, click here for more information on last year's tax incentive for first-time homebuyers.
Friday, February 27, 2009
Monday, February 16, 2009
Illinois Tax Proration Credits in Sales Contracts
During the course of a residential closing transaction, the question inevitably comes up: What about the real estate taxes? Well, during the attorney review process, your attorney and the other attorney will typically reach a resolution of what to do with the real estate taxes. It's helpful, however, if the buyer and seller understand how and when real estate taxes in Illinois are billed first, so that they can better understand how and why taxes are prorated at closing. For the basics on how Illinois real estate taxes are billed, please click here.
Once you're familiar with the process, you can understand the following better: In the vast majority of residential sales contracts in Illinois, taxes that have already accrued, but are not yet billed, are credited by the seller to the purchaser at closing. This credit is typically, though not always, final. In certain circumstances, a tax reproration agreement may be used in lieu of or in addition to a credit. Please note that this blog post covers real estate tax credits as they relate to existing property only, not new construction or condominiums in the conversion process.
As a Purchaser, your goal is to make sure you are receiving enough tax monies to cover the taxes the Seller accrued on the property prior to sale. Why? Because taxes in Illinois are billed a year after they are accrued. Therefore, after closing, you will receive tax bills for a portion of time in which the Seller owned the property. For example, if you are closing in January of 2009, you will receive the entire tax bill for 2008 (two bills) after you close, in the spring and fall of 2009. On the other other hand, if you are closing in May of 2009, you will also receive two tax bills for the period of time in which the Seller owned the property -- in the fall of 2009 and the spring of 2010.
Taxes typically go up every year, and many times we do not know exactly what the new tax bill will be. If your property has not received a new assessed value for the last or current tax year, then in Illinois it is typical for the Seller to credit the Purchaser 105%, and in certain circumstances up to 110%, of the last full-year tax bill available, prorated day-for-day to reflect the period of time the Seller owned the property prior to closing for which the Seller has not yet received a bill.
Here's an illustration of how this works: Let's say you bought an existing house in Chicago in December of 2008. That means that you will receive two tax bills for the time in which the Seller owned the property -- one in February of 2009, and the next one in the fall of 2009. Since Chicago was not reassessed in 2008, you probably received a tax credit of 105% of the last full-year available tax bill, which is currently the 2007 tax bill. The rationale behind this is that since Chicago was not reassessed in 2008, your tax bill will probably not go up more than %5 from 2007. Assuming your tax proration credit was final, if the actual 2008 tax bill is less than 105% of the 2007 tax bill, that's great -- you made some money. On the other hand, if the actual 2008 tax bill is greater than 105% of the 2007 tax bill, then you are responsible for the difference.
Now let's use a different example -- Let's say that you did not close in December of 2008. You are still buying an existing home in Chicago, but you will be closing in April of 2009. How will your tax proration credit be different? Well, first of all, you will still receive two tax bills for a period of time during which the Seller owned the property, for which you are now responsible. You will receive one such tax bill in the fall of 2009, and the other one in February of 2010. Again, 2008 was not a reassessment year for Chicago, therefore you will probably only receive a 105% credit for the second half of 2008, although you might receive a little bit more depending on the circumstances and the agreement your attorney reaches with the other attorney. 2009, on the other hand, is a reassessment year for the City of Chicago. Those taxes are completely up in the air -- when you close in April of 2009, it will be too early to determine what your 2009 tax liability will be. To that end, your attorney should make sure that you receive a larger credit for January 1, 2009 through your closing date in April. If both the buyer and the seller decide that they want to resolve the issue once and for all at closing, and don't want to revisit the issue in 2010 when the tax bill is finally available, the seller might agree to provide a larger credit to the buyer at closing -- perhaps 115% - 125% of the last full-year tax bill, prorated for January - April 2009. On the other hand, it might be more prudent to enter into a tax reproration agreement at closing. For more information on what a real estate tax reproration agreement is, please click here.
Now let's say you are buying that same home in Chicago, but in December of 2009. By the end of 2009, the new anticipated assessed value for your property will be known. Based on that assessed value, your attorney will calculate what the tax bill, and the corresponding tax credit, ought to be. Therefore you will probably receive a fairly accurate tax credit for 2009. You will receive the 2009 tax bills in the spring and fall of 2010, and your property will not be reasessed again until 2012.
Your attorney may also consider existing property tax exemptions or the status of any property tax appeals when making his or her determination about how much the tax proration credit should be. Depending on what time of year you are closing, which county you are located in, or which portion of Cook County your property is in (since a different portion of Cook County is reassessed every year), your real estate attorney will guide you as to what is the best option for you -- whether you are a buyer or a seller.
Real estate tax proration credits may seem complex, but a good real estate attorney will know how to structure a proper tax credit intrinsically, and you can look to him or her for advice. While people approach real estate tax prorations differently, I feel it is important to be guided by two fundamentals: 1) What is simple and practical, given each client's individual situation, and 2) What is fair. Remember, the goal of a real estate tax proration credit is not for the seller to try to give the buyer less than what is due to him, or for the buyer to try to get more than what he will actually need. Rather, the goal is to make sure that the taxes are paid without causing undue burden to either party.
Once you're familiar with the process, you can understand the following better: In the vast majority of residential sales contracts in Illinois, taxes that have already accrued, but are not yet billed, are credited by the seller to the purchaser at closing. This credit is typically, though not always, final. In certain circumstances, a tax reproration agreement may be used in lieu of or in addition to a credit. Please note that this blog post covers real estate tax credits as they relate to existing property only, not new construction or condominiums in the conversion process.
As a Purchaser, your goal is to make sure you are receiving enough tax monies to cover the taxes the Seller accrued on the property prior to sale. Why? Because taxes in Illinois are billed a year after they are accrued. Therefore, after closing, you will receive tax bills for a portion of time in which the Seller owned the property. For example, if you are closing in January of 2009, you will receive the entire tax bill for 2008 (two bills) after you close, in the spring and fall of 2009. On the other other hand, if you are closing in May of 2009, you will also receive two tax bills for the period of time in which the Seller owned the property -- in the fall of 2009 and the spring of 2010.
Taxes typically go up every year, and many times we do not know exactly what the new tax bill will be. If your property has not received a new assessed value for the last or current tax year, then in Illinois it is typical for the Seller to credit the Purchaser 105%, and in certain circumstances up to 110%, of the last full-year tax bill available, prorated day-for-day to reflect the period of time the Seller owned the property prior to closing for which the Seller has not yet received a bill.
Here's an illustration of how this works: Let's say you bought an existing house in Chicago in December of 2008. That means that you will receive two tax bills for the time in which the Seller owned the property -- one in February of 2009, and the next one in the fall of 2009. Since Chicago was not reassessed in 2008, you probably received a tax credit of 105% of the last full-year available tax bill, which is currently the 2007 tax bill. The rationale behind this is that since Chicago was not reassessed in 2008, your tax bill will probably not go up more than %5 from 2007. Assuming your tax proration credit was final, if the actual 2008 tax bill is less than 105% of the 2007 tax bill, that's great -- you made some money. On the other hand, if the actual 2008 tax bill is greater than 105% of the 2007 tax bill, then you are responsible for the difference.
Now let's use a different example -- Let's say that you did not close in December of 2008. You are still buying an existing home in Chicago, but you will be closing in April of 2009. How will your tax proration credit be different? Well, first of all, you will still receive two tax bills for a period of time during which the Seller owned the property, for which you are now responsible. You will receive one such tax bill in the fall of 2009, and the other one in February of 2010. Again, 2008 was not a reassessment year for Chicago, therefore you will probably only receive a 105% credit for the second half of 2008, although you might receive a little bit more depending on the circumstances and the agreement your attorney reaches with the other attorney. 2009, on the other hand, is a reassessment year for the City of Chicago. Those taxes are completely up in the air -- when you close in April of 2009, it will be too early to determine what your 2009 tax liability will be. To that end, your attorney should make sure that you receive a larger credit for January 1, 2009 through your closing date in April. If both the buyer and the seller decide that they want to resolve the issue once and for all at closing, and don't want to revisit the issue in 2010 when the tax bill is finally available, the seller might agree to provide a larger credit to the buyer at closing -- perhaps 115% - 125% of the last full-year tax bill, prorated for January - April 2009. On the other hand, it might be more prudent to enter into a tax reproration agreement at closing. For more information on what a real estate tax reproration agreement is, please click here.
Now let's say you are buying that same home in Chicago, but in December of 2009. By the end of 2009, the new anticipated assessed value for your property will be known. Based on that assessed value, your attorney will calculate what the tax bill, and the corresponding tax credit, ought to be. Therefore you will probably receive a fairly accurate tax credit for 2009. You will receive the 2009 tax bills in the spring and fall of 2010, and your property will not be reasessed again until 2012.
Your attorney may also consider existing property tax exemptions or the status of any property tax appeals when making his or her determination about how much the tax proration credit should be. Depending on what time of year you are closing, which county you are located in, or which portion of Cook County your property is in (since a different portion of Cook County is reassessed every year), your real estate attorney will guide you as to what is the best option for you -- whether you are a buyer or a seller.
Real estate tax proration credits may seem complex, but a good real estate attorney will know how to structure a proper tax credit intrinsically, and you can look to him or her for advice. While people approach real estate tax prorations differently, I feel it is important to be guided by two fundamentals: 1) What is simple and practical, given each client's individual situation, and 2) What is fair. Remember, the goal of a real estate tax proration credit is not for the seller to try to give the buyer less than what is due to him, or for the buyer to try to get more than what he will actually need. Rather, the goal is to make sure that the taxes are paid without causing undue burden to either party.
Tuesday, February 10, 2009
What is a Real Estate Tax Reproration Agreement?
During the course of a real estate purchase or sale transaction, the parties' attorneys will work to make sure that a fair tax credit is provided to minimize the burden of real estate taxes on both parties in the transaction. While other methods are used as well, in some instances, a real estate tax reproration agreement is the best option available. Tax reproration agreements are almost universally used in large commercial transactions (though not always in smaller commercial transactions), and are also often used in new residential construction. They are also used in residential resale transactions when an accurate tax credit cannot be determined at the time of closing, which could happen for any number of reasons.
So what is a real estate tax reproration agreement? Basically, it is an agreement between the parties to reprorate the tax bills when they become available in the future. Such agreements come in handy because in Illinois, real estate taxes are billed a year after they accrue; therefore, at the time of closing, the tax liability may be unknown. After closing, the buyer will become responsible for all of the upcoming tax bills, including the tax bills for the year prior to closing.
In a typical real estate tax reproration agreement, the seller will give the buyer an approximate tax credit based on the most current tax information available for the property. When the actual tax bill comes out, the seller will be responsible for any shortage for his period of ownership. If it turns out that the bill is less than the credit that the seller gave the buyer, then the buyer must return the excess funds to the seller.
The primary advantage of using a tax reproration agreement is that if all goes well, the outcome is the most fair outcome you can have -- each party only pays what he actually owes, and nothing more. On the other hand, there are some important disadvantages to note as well. For example, many people prefer to close on a property and be done with it; they do not want to have to revisit the tax issue a year or more after closing. Also, it is always possible that one party to the agreement may not have any money at the time of reproration, and will therefore be unable to fulfill his obligations. Of course, a standard tax reproration agreement allows you to sue the other party in the event of default, but lawsuits can be costly. There is also a chance that one party to the tax reproration agreement might pass away before the taxes are reprorated, and the other party would then have to seek out the deceased's estate to collect any tax monies owed.
So what is a real estate tax reproration agreement? Basically, it is an agreement between the parties to reprorate the tax bills when they become available in the future. Such agreements come in handy because in Illinois, real estate taxes are billed a year after they accrue; therefore, at the time of closing, the tax liability may be unknown. After closing, the buyer will become responsible for all of the upcoming tax bills, including the tax bills for the year prior to closing.
In a typical real estate tax reproration agreement, the seller will give the buyer an approximate tax credit based on the most current tax information available for the property. When the actual tax bill comes out, the seller will be responsible for any shortage for his period of ownership. If it turns out that the bill is less than the credit that the seller gave the buyer, then the buyer must return the excess funds to the seller.
The primary advantage of using a tax reproration agreement is that if all goes well, the outcome is the most fair outcome you can have -- each party only pays what he actually owes, and nothing more. On the other hand, there are some important disadvantages to note as well. For example, many people prefer to close on a property and be done with it; they do not want to have to revisit the tax issue a year or more after closing. Also, it is always possible that one party to the agreement may not have any money at the time of reproration, and will therefore be unable to fulfill his obligations. Of course, a standard tax reproration agreement allows you to sue the other party in the event of default, but lawsuits can be costly. There is also a chance that one party to the tax reproration agreement might pass away before the taxes are reprorated, and the other party would then have to seek out the deceased's estate to collect any tax monies owed.
Tuesday, February 3, 2009
Illinois Real Estate Taxes -- How and When Are They Billed?
In the last couple of days, most Cook County property owners have received their 2008 First Installment Tax Bill. During the course of a closing transaction, I inevitably have to explain how and when real estate taxes are billed in Illinois. Here's a primer:
Taxes in Illinois are billed and become due approximately one year after they accrue. In other words, the taxes for January 1, 2007 - June 30, 2007 became due in the first half of 2008. Likewise, taxes for July 1, 2007 - December 31, 2007 became due in the second half of 2008. Similarly, taxes for the first half of 2008 will become due in early 2009, and taxes for the second half of 2008 will become due in the second half of 2009.
Most Illinois counties, including the collar counties (Lake County, DuPage County, McHenry County, and Will County), follow a fairly straightforward system. They determine the new total tax amount due for each parcel of real estate. Then, in the early part of each year, each county sends a tax bill to each property owner for the entire previous year. Property owners are required to pay half of the bill around May (although the actual month will vary by county) and the other half around August (again, the actual month in which taxes become due may vary by county).
Cook County, on the other hand, follows a different system. Like other counties, Cook County property owners typically receive a bill in the early part of each year, albeit a bit earlier than the other counties -- typically by the first week of February. This first installment tax bill is due in early March. The first installment tax bill is always exactly half of the last full-year tax bill available. For example, if you own property in Cook County and if your 2007 total taxes for that property were $5000, then your first installment bill for 2008 (which is not billed or payable until February 2009) will be $2500. If your property was unimproved or in the process of a conversion (i.e. a condominium conversion) in 2007, and if your 2007 tax bill was thus zero, your first installment tax bill for 2008 will also be zero -- because half of zero, of course, is still zero.
Cook County will not send your second installment tax bill until the fall of each year. The entire increase in your property taxes will be included in the second installment tax bill. In the vast majority of circumstances, the second installment Cook County tax bill is higher than the first installment tax bill, since taxes typically go up. How much higher your second installment tax bill is depends on a number of factors, such as where your property is in the reassessment cycle, what new tax exemptions, if any, you are receiving, if a new assessed value is being assigned to your property or not, and what the new tax rate in your area is. Cook County is split up into three parts, and a portion of Cook County is reassessed each year. For some idea about when your area was or will be reassessed, please look here.
Other counties are also reassessed periodically. Lake County, for example, is reassessed every three years. If you own or are purchasing or selling property in any of the collar counties and you're not sure when you will be reassessed, you can call your county assessor's office and ask them. Links to the Cook County Assessor, as well as the DuPage, Lake, McHenry and Will County Assessors' offices, are provided at the side of this page for your convenience.
Taxes in Illinois are billed and become due approximately one year after they accrue. In other words, the taxes for January 1, 2007 - June 30, 2007 became due in the first half of 2008. Likewise, taxes for July 1, 2007 - December 31, 2007 became due in the second half of 2008. Similarly, taxes for the first half of 2008 will become due in early 2009, and taxes for the second half of 2008 will become due in the second half of 2009.
Most Illinois counties, including the collar counties (Lake County, DuPage County, McHenry County, and Will County), follow a fairly straightforward system. They determine the new total tax amount due for each parcel of real estate. Then, in the early part of each year, each county sends a tax bill to each property owner for the entire previous year. Property owners are required to pay half of the bill around May (although the actual month will vary by county) and the other half around August (again, the actual month in which taxes become due may vary by county).
Cook County, on the other hand, follows a different system. Like other counties, Cook County property owners typically receive a bill in the early part of each year, albeit a bit earlier than the other counties -- typically by the first week of February. This first installment tax bill is due in early March. The first installment tax bill is always exactly half of the last full-year tax bill available. For example, if you own property in Cook County and if your 2007 total taxes for that property were $5000, then your first installment bill for 2008 (which is not billed or payable until February 2009) will be $2500. If your property was unimproved or in the process of a conversion (i.e. a condominium conversion) in 2007, and if your 2007 tax bill was thus zero, your first installment tax bill for 2008 will also be zero -- because half of zero, of course, is still zero.
Cook County will not send your second installment tax bill until the fall of each year. The entire increase in your property taxes will be included in the second installment tax bill. In the vast majority of circumstances, the second installment Cook County tax bill is higher than the first installment tax bill, since taxes typically go up. How much higher your second installment tax bill is depends on a number of factors, such as where your property is in the reassessment cycle, what new tax exemptions, if any, you are receiving, if a new assessed value is being assigned to your property or not, and what the new tax rate in your area is. Cook County is split up into three parts, and a portion of Cook County is reassessed each year. For some idea about when your area was or will be reassessed, please look here.
Other counties are also reassessed periodically. Lake County, for example, is reassessed every three years. If you own or are purchasing or selling property in any of the collar counties and you're not sure when you will be reassessed, you can call your county assessor's office and ask them. Links to the Cook County Assessor, as well as the DuPage, Lake, McHenry and Will County Assessors' offices, are provided at the side of this page for your convenience.
Sunday, January 25, 2009
RESPA Revisions Effective January 2010
In order to make HUD-1 closing statements more transparent for the parties involved, the Department of Housing and Urban Development (HUD) has made a number of changes that will take effect on January 1, 2010. HUD has tried to protect consumers, particularly buyers, during the course of dealing with their lenders and at the closing table. Here are some of the changes:
1) Mortgage brokers will need to calculate their commissions from their lenders (known as yield-spread premiums) as part of the loan origination fee. HUD hopes that by integrating the yield-spread premium into the origination fee, brokers will be less likely to place their customers into loans at the high end of the interest-rate spread.
2) Lenders will have to complete a new good faith estimate form, which will be three pages long as opposed to the current two-page form.
3) Origination fees and transfer taxes on the HUD-1 must be exactly as stated on the lender's good faith estimate.
4) Some costs from entities unaffiliated with the lender (ie. certain title company and inspection fees) can change between the good faith estimate and the HUD-1, but the change cannot be greater than 10%. Note that deals may still close if the discrepancy is greater than 10%, but all discrepancies will have to be reconciled and corrected within 30 days.
1) Mortgage brokers will need to calculate their commissions from their lenders (known as yield-spread premiums) as part of the loan origination fee. HUD hopes that by integrating the yield-spread premium into the origination fee, brokers will be less likely to place their customers into loans at the high end of the interest-rate spread.
2) Lenders will have to complete a new good faith estimate form, which will be three pages long as opposed to the current two-page form.
3) Origination fees and transfer taxes on the HUD-1 must be exactly as stated on the lender's good faith estimate.
4) Some costs from entities unaffiliated with the lender (ie. certain title company and inspection fees) can change between the good faith estimate and the HUD-1, but the change cannot be greater than 10%. Note that deals may still close if the discrepancy is greater than 10%, but all discrepancies will have to be reconciled and corrected within 30 days.
Saturday, January 17, 2009
Loan Modifications -- How to Afford Your Monthly Payment
Many lenders will work with homeowners who are unable to pay their monthly mortgage. If you are having difficulty making your mortgage payment, you might want to consider trying to get a loan modification. Modifications come in many forms -- you might get a temporary or permanent payment reduction, an interest rate reduction, temporary abatement, extension of the payment period, or some sort of mixture of these options. However, the bottom line is that help may be available to you; most importantly, you may be able to keep your home.
Of course, getting your lender to negotiate their loan with you is not easy. Many lenders won't discuss the matter with you until you've missed a number of monthly payments. You may not want to get yourself in that situation for any number of reasons -- it will affect your credit, you feel it will tarnish your name, you are not comfortable intentionally defaulting, etc. Whatever your reason may be, some lenders have taken a hard-line stance on loan modifications, and they will not consider a loan modification unless you have already defaulted.
However, the good news is that more and more lenders are now trying to be proactive in helping homeowners before they default. For example, last month Fannie Mae announced that its loan servicers must allow "early workout" loan modifications for homeowners, even if those homeowners have never missed or been late on a mortgage payment. If your loan is owned by Fannie Mae and you are reasonably sure that imminent changes in your financial situation or income will case you to miss mortgage payments, you may qualify for a loan modification without having defaulted on your loan.
In order to take advantage of this, you need to find out if your loan is owned by Fannie Mae; Fannie Mae currently owns over 18 million loans nationwide. If it is, you should contact your loan servicer to get the ball rolling. Keep in mind that you will be required to provide a great deal of personal financial information. If your loan modification is approved, you will be placed on a four-month trial period. If you make your payments on time during those four months, your modified loan could become your permanent loan.
Other lenders are also demonstrating increased flexibility with respect to loan modifications. However, each lender is different and has its own set of rules. Before you default or can no longer afford to pay your loan, it is a good idea to contact your lender and proactively work to come up with affordable payment terms so that you can keep your home.
Of course, getting your lender to negotiate their loan with you is not easy. Many lenders won't discuss the matter with you until you've missed a number of monthly payments. You may not want to get yourself in that situation for any number of reasons -- it will affect your credit, you feel it will tarnish your name, you are not comfortable intentionally defaulting, etc. Whatever your reason may be, some lenders have taken a hard-line stance on loan modifications, and they will not consider a loan modification unless you have already defaulted.
However, the good news is that more and more lenders are now trying to be proactive in helping homeowners before they default. For example, last month Fannie Mae announced that its loan servicers must allow "early workout" loan modifications for homeowners, even if those homeowners have never missed or been late on a mortgage payment. If your loan is owned by Fannie Mae and you are reasonably sure that imminent changes in your financial situation or income will case you to miss mortgage payments, you may qualify for a loan modification without having defaulted on your loan.
In order to take advantage of this, you need to find out if your loan is owned by Fannie Mae; Fannie Mae currently owns over 18 million loans nationwide. If it is, you should contact your loan servicer to get the ball rolling. Keep in mind that you will be required to provide a great deal of personal financial information. If your loan modification is approved, you will be placed on a four-month trial period. If you make your payments on time during those four months, your modified loan could become your permanent loan.
Other lenders are also demonstrating increased flexibility with respect to loan modifications. However, each lender is different and has its own set of rules. Before you default or can no longer afford to pay your loan, it is a good idea to contact your lender and proactively work to come up with affordable payment terms so that you can keep your home.
Sunday, January 11, 2009
Mortgages and Earnest Money
In today's real estate market, more and more contracts tend to fall apart, often because the buyer is unable to procure a mortgage on satisfactory terms, if at all. As the lending market gets tougher, I hear the following questions a lot from buyers: "Is my earnest money protected? Can I get my earnest money back?" I also hear the inverse from Sellers: "Can I keep the earnest money?"
A standard real estate contract will set forth various contingencies that the parties must meet in order to close. One of these contingencies is the mortgage contingency. For a detailed explanation of what a mortgage contingency clause is, click here. To see how the mortgage contingency affects your earnest money, keep reading!
If the buyer is unable to procure a mortgage commitment stating that the lender's various conditions have been met, and the buyer thus does not have a loan, then the buyer is entitled to a return of all earnest monies under a standard real estate contract (i.e. a realtor-form contract) if the contract had a mortgage contingency clause which protects the buyer and if the buyer notifies the seller that he has not obtained a loan within the mortgage contingency period. Each contract is different, but standard realtor forms for residential real estate in Illinois include such a mortgage contingency, and so long as the contingency is not crossed out when placing the offer, the dates and interest rates listed therein are key provisions in determining whether the buyer gets his earnest money back.
If the mortgage contingency states that the buyer is obtaining a loan for 80% of the purchase price for a 30-year fixed term with an interest rate not to exceed 6.5%, and the buyer is able to obtain such a loan, then technically the buyer is required to close, even if his interest rate might be a little bit higher than he wanted (i.e the buyer got an interest rate of 6.25% and he was hoping for 5.75%). Some contracts also allow the seller to find a loan for the buyer if the buyer is unable to obtain a loan on his own. In such instances, if a buyer's loan is denied and he notifies the seller in a timely manner pursuant to the mortgage contingency in the contract, the seller will have an opportunity to search for a loan for the buyer, though seller need not do so. If the seller chooses to try and is also unable to get a loan for the buyer, then he must return the earnest money as per the terms of the contract.
Keep in mind that in certain situations, the earnest money terms may be different because they may have been negotiated by the parties' attorneys as per their clients' needs, and the contract might have been written by the attorneys, instead of using a form contract. This is true in some residential contracts, and in many commercial contracts. If you are concerned about what the earnest money provisions in your contract might be, you should have the contract carefully reviewed by your attorney.
A standard real estate contract will set forth various contingencies that the parties must meet in order to close. One of these contingencies is the mortgage contingency. For a detailed explanation of what a mortgage contingency clause is, click here. To see how the mortgage contingency affects your earnest money, keep reading!
If the buyer is unable to procure a mortgage commitment stating that the lender's various conditions have been met, and the buyer thus does not have a loan, then the buyer is entitled to a return of all earnest monies under a standard real estate contract (i.e. a realtor-form contract) if the contract had a mortgage contingency clause which protects the buyer and if the buyer notifies the seller that he has not obtained a loan within the mortgage contingency period. Each contract is different, but standard realtor forms for residential real estate in Illinois include such a mortgage contingency, and so long as the contingency is not crossed out when placing the offer, the dates and interest rates listed therein are key provisions in determining whether the buyer gets his earnest money back.
If the mortgage contingency states that the buyer is obtaining a loan for 80% of the purchase price for a 30-year fixed term with an interest rate not to exceed 6.5%, and the buyer is able to obtain such a loan, then technically the buyer is required to close, even if his interest rate might be a little bit higher than he wanted (i.e the buyer got an interest rate of 6.25% and he was hoping for 5.75%). Some contracts also allow the seller to find a loan for the buyer if the buyer is unable to obtain a loan on his own. In such instances, if a buyer's loan is denied and he notifies the seller in a timely manner pursuant to the mortgage contingency in the contract, the seller will have an opportunity to search for a loan for the buyer, though seller need not do so. If the seller chooses to try and is also unable to get a loan for the buyer, then he must return the earnest money as per the terms of the contract.
Keep in mind that in certain situations, the earnest money terms may be different because they may have been negotiated by the parties' attorneys as per their clients' needs, and the contract might have been written by the attorneys, instead of using a form contract. This is true in some residential contracts, and in many commercial contracts. If you are concerned about what the earnest money provisions in your contract might be, you should have the contract carefully reviewed by your attorney.
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