What Is Evidence of Funds?
As prices throughout our state have gone up it has become more and more common to provide offers that are either all cash, or at least the appearance of all cash, and a greater need for receiving funds that may be contingent on some event. What I mean by that is it could be a gift from a parent or grandparent which the buyer is relying on to assist them in purchasing the property.
Another common source of contingent funds is the sale of stocks or bonds. Any contingent source of funds that doesn't include the financing contingency, the home sale contingency, or a pending sale contingency needs to be disclosed.
There's a form that adds to the Purchase and sale agreement called 22EF (addendum). EF stands for evidence of funds. The need for this form and its use is set forth in the purchase and sale agreement.
The language states that the buyer is not relying on any contingent source of funds unless it's defined in the agreement. Now attaching 22 evidence of funds addendum will take care of the required disclosure. The state has made it a priority to emphasize this form should be included in all transactions that require cash.
We have to ask the buyer in what form they have their closing costs and down payment funds. Is it in their bank or is it in another form, be it a gift from another family member, stocks that I already mentioned, stock options, upcoming bonus, bonds, or perhaps retirement accounts? It could also be money they are expecting from selling a boat, car or some other already owned asset.
In order to be classified as non-contingent, the form states:
“The buyer currently has in their possession and for which there is no contingency, such as financing (NWMLS Form 22A or equivalent), sale of the Buyer’s property (NWMLS Form 22B or equivalent) or pending sale of Buyer’s property (NWMLS Form 22Q or equivalent).”
We need to be mindful that the form is clear that the buyer doesn’t need to re-disclose contingent funds they have already disclosed through other means, the financing addendum showing a loan, or the sale of their current property. What constitutes a non-contingent funds are money in a USA financial institution, cash, in the buyer’s name.
What is Evidence?
Evidence means document(s) from financial institution(s) in the United States showing that buyer has sufficient cash or cash equivalent in United States funds.
What are Contingent funds?
Contingent funds mean funds that buyer does not currently have, but expects to receive from another source prior to closing, and for which there is no contingency, such as a loan, proceeds from the sale of other property or stock, retirement funds, foreign funds, a gift, or future earnings.
As is stated in the definition provided by the form, there is a need to disclose loans for which there is no contingency, meaning those not included in the form 22A or other type of financing contingency. The default number of days to disclose evidence of non-contingent funds is 3 days, but of course, many buyers are including the evidence along with their offer to remain competitive.
What are non-contingent funds?
Non-contingent funds mean funds that buyer currently has in its possession and for which there is no contingency, such as financing (Form 22A or equivalent), sale of buyer's property (Form 22B or equivalent) or pending sale of buyer's property (Form 22Q or equivalent).
An important provision indicates the buyer has to notify the seller and receive their consent if they use the non-contingent funds they are providing as evidence for anything besides the purchase of the property. Practically, this means the buyer is tying up the non-contingent funds and restricting the use to the purchase. If the buyer doesn't provide notice of the evidence, they said they would provide, the seller can go ahead and terminate the agreement at any time prior to the evidence being provided. This means if the buyer doesn't provide the evidence within the allotted time, say 3 days, and the seller doesn't say anything, and the buyer provides that evidence on day 5, the transaction will continue forward as agreed.
The evidence that buyer has received the contingent funds needs to be given 10 days prior to closing. The important part of this time provision is there has been an update to the purchase and sale agreement providing a legal definition to how we count time from closing backwards. In this case, we are counting backwards from the date of closing, 10 days prior in default. Now, the new provision in the purchase and sale agreement says the first day before closing is day one, and we count backwards from there. If, however, we land on a public holiday or weekend we will advance forward to the first business day. Practically, if the 10th day in the past from the closing day is a Saturday the deadline becomes Monday. The counting of time back from closing does not change the other time provision in the contract which states that 5 days or less are business days and 6 days or more are calendar days. Another part of counting backwards is if the closing day falls on a Sunday, we would move the closing day to the next business day. So, let's say there was a mistake and closing was a date on a Sunday. This means the next business day would be the actual closing date, perhaps Monday, provided it's not a holiday. We would then count backwards from Monday. This makes day 1 in the counting to be Sunday, then Saturday then Friday 3 etcetera. Of course, only if we were counting more than 5 days.
Should the buyer fail to close on time because of contingent funds, the buyer will be in default and seller will be allowed to whatever remedies which were agreed on the purchase and sale agreement, most commonly the forfeiture of buyer's earnest money.
We need to make sure we don't fall into the trap of avoiding this form just so we allow our buyers to avoid disclosure and the timelines that provide risk for default. We really can't avoid it anymore because the purchase and sale agreement is clear that the buyer is not relying on contingent funds when they sign form 21. So, any reliance on contingent funds to the contrary of what they signed could open the buyer and broker up to legal action.
It’s helpful to provide proof of funds to solidify the offer to the seller as they evaluate their options. Importantly, you should be mindful to remove the account details (the account number) when providing a copy of a bank statement proving funds are non-contingent.
The 22EF is helpful in giving a buyer an option to provide the evidence of non-contingent funds that isn’t immediately sent over with the offer should they need to get a letter from their bank stating funds are available. They may choose to do this in case they don’t want to share with the seller exactly what’s in their bank account. One of the reasons a buyer may be reluctant is if they have more money in the account than is needed for non-contingent funds and they don’t want to disclose that fact to the seller and compromise their negotiation or financial flexibility.
There are cases where a buyer could disclose the loan, they are receiving from a family member or even a financial institution on the 22EF. A buyer may choose to do that if they don't want to have a financing contingency and all of the protections that it provides. That would remove any low appraisal protection. It would also remove any protection a normal financing addendum would provide such as being contingent on receiving the loan. If the buyer was unable to receive the loan from a family member or a financial institution their inability to close would constitute default and whatever was chosen in the form 21 whether that was the seller's election of remedies or forfeiture of earnest money. If the buyer wants to be that aggressive and skip the financing contingency as well as all its protections, it's important to lay out the risk the buyer is taking.
Fortunately, the form lays out the opportunity for the property to be appraised even if it's a family member providing a loan to the buyer. If a buyer does choose to take the additional risk of disclosing loans on this form without any of the formal protections of a financing addendum it's best practice to write down that you discussed with them what those risks are and receive confirmation that they are aware of the risks and would like to move forward. Email of course is the easiest way to do this.
When providing evidence to the seller in a timely manner we have to be really careful that we fill out the form properly because if it is a loan, a traditional one, those funds typically are provided on the day of closing by the financial institution and therefore you can't leave the form blank where it says how many days before closing you'll provide evidence of the funds. Otherwise, the buyer is stating they will have in their bank account all the funds necessary from the loan 10 days prior to closing. This of course isn’t going to happen because a financial institution is not going to provide a loan that goes directly to an individual's bank account ten days prior to closing. It doesn't mean the seller should terminate the agreement as a result of failing to provide evidence, resulting in the loss of earnest money or other remedies, but the buyer could lose the ability to purchase property.
When it’s a competitive situation, it’s best of course to provide proof of funds so there is no question as to the buyer’s financial ability. Documentation is a flexible term since the form is basically requiring evidence from their financial institution which should include the date of the balance, the amount, and the name of the individual matching the buyer line of the purchase and sale. Many times, it’s a quick download of a pdf or even a screenshot of the account.
This addendum requires buyer to provide evidence of funds which he/she intends to use to purchase the property. If buyer fails to timely provide the evidence, seller may terminate the Purchase and Sale Agreement. The addendum has options for funds that buyer currently possesses (non-contingent funds) or funds that will come from other sources, such as loan, gift or the sale of stock (contingent funds). The addendum can be used for evidence of funds for a cash purchase or for a down payment.
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