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Sales & Purchase Agreement (SPA) and mortgage contracts in the US

Are you a prospective homebuyer in the US? Learn about the SPA and mortgage contract – both important legal documents you should understand.

The property buying process in the US

So you’re looking to buy a real estate property in the US? Owning a property gives you more freedom and living security than renting, not to mention it's a great long-term investment due to high home value appreciation in the US. While property ownership is an exciting prospect, the home-buying process comes with an abundance of costs, paperwork, and risks that many people are unfamiliar with before entering the real estate market. The sooner you start to learn about the specifics of real estate purchases, the easier and smoother your home purchase will be (not to mention it could help you avoid unexpected problems and costs).  

This article will explain two legally-binding contracts that are important in real estate purchases: the Sales and Purchase Agreement (SPA) contract and the mortgage contract. Once you’ve found a property and gotten preapproved for a mortgage loan, you’ll be faced with the Sales and Purchase Agreement (SPA) contract. The mortgage contract is an essential document for homebuyers that have taken out a mortgage loan to finance their purchase and is signed during closing. We’ll learn about the importance of an SPA contract, its sections, and procedure, and the importance of a mortgage contract, its sections, and procedure. Read on to become an informed homebuyer!

What is an SPA contract?

A Sales and Purchase Agreement (SPA) is a legal contract that’s used to ensure that a transaction will occur between two parties: a seller and a buyer. While an SPA contract is used as assurance before various large transactions are finalized, for the average person, it’s probably most relevant when it comes to real estate transactions. The SPA provides a framework for negotiating and laying out the terms and conditions of the sale that the buyer and seller have agreed upon to ensure that both parties follow through on their promises prior to closing the transaction.

An SPA is the most common type of real estate contract and may also be referred to as a Purchase and Sales Agreement (PSA), an agreement of sale, a purchase contract, or a sale contract.

This agreement is important because it protects both the buyer and seller if there’s a failed transaction, that is if either party neglects to uphold the terms and conditions that were agreed upon in the contract. On the other hand, if all terms and conditions are met and there aren’t any substantial problems found with the property, the contract gives both parties confidence that the transaction will successfully occur. 

In general, the SPA is written up by an independent third party, either the real estate agent or a real estate attorney/lawyer if the property is For Sale By the Owner (FSBO). In the case of an FSBO property, the buyer may be responsible for the SPA contract. It’s recommended that the buyer employs an experienced attorney to ensure that the purchase agreement is comprehensive. The parties that are allowed to assist in this process may vary by state due to differing regulations (e.g. some states may require the SPA to be drafted by a state-licensed lawyer).

SPA contract: key sections and procedures

An SPA is drafted when both the buyer and the seller accept the terms and conditions and want to move forward with the real estate transaction. Since the buyer is making a large purchase and wants to ensure that they’re protected if any major problems arise, they work with the real estate agent, attorney, or lawyer to include any requests or conditions that they want to be met before they finalize the purchase. The third party will then present the seller with the contract and the document can be sent back and forth with negotiations made until both parties are satisfied with the terms and conditions of the transaction. 

But what exactly should a buyer and seller be looking to negotiate in the SPA? There’s no minimum length for the contract and the specifics included can vary based on the preferences of both parties. 

Here’s information that’s usually included in an SPA:

  • Asset identification: address and parcel number

  • Final sales price 

  • Purchase conditions 

    • Value of the initial deposit (aka earnest money) 

    • How to make the deposit 

    • Payment schedule 

  • Closing date 

  • Due diligence 

    • Both parties acknowledge their role in the process 

    • Time periods are set for any deposits and upfront payments 

    • Buyer acknowledges the condition of the property

    • Buyer confirms their right to terminate the agreement under specific conditions 

  • Contingencies prior to close 

    • Outlines the next steps 

    • Conditions that must be met for the contract to be legally binding 

    • Covenants for risk mitigation 

  • Damages: what will be done if there are any minor or major damages before the purchase 

  • Title information

  • Broker commissions 

    • Payment and timing of payments 

    • The party responsible for paying the broker 

Contingencies that are commonly included are:

  • Inspection contingency - no severe problems found during the home inspection 

  • Financing contingency - buyer must get approved for a mortgage 

  • Title contingency - seller must satisfy problems with the property title 

  • Appraisal contingency - appraisal value must be aligned with the sales price

  • Home sale contingency - buyer must be able to sell their current home

  • Addendum (any additional request) 

    • E.g. for the seller to include extra appliances/furniture or pay for the buyer’s title insurance 

In some cases, the SPA may include specific dates by which the buyer must have applied for a mortgage, obtained pre-qualification, pre-approval, final approval, or closed on the purchase. 

Once the buyer and seller agree on the content of the SPA, the contract is signed by both parties and their respective agents. The buyer makes the deposit as laid out in the purchase conditions and then the rest of the process including home inspections, title searches, home valuation, and loan agreements begins. 

But what happens if a buyer or seller don’t meet the terms and conditions agreed to in the SPA contract? If any conditions included in the SPA aren’t met, the buyer or seller may be deemed “out of contract” and could have to close under less favorable terms or lose the sale or purchase entirely. The other party could decide to terminate the sale and walk away from the agreement with no repercussions on their behalf. If the buyer breaches the contract, they forfeit their entire deposit. Given the consequences, it’s important that both parties make any necessary requests during the SPA negotiation. However, either party may also seek to renegotiate afterward if additional problems are found with the property or there are unforeseen delays in the process. 

When a real estate agent is involved in the transaction process, there are no additional fees for writing up the SPA contract since the agent will take a commission on the sale price at the end. However, if a real estate attorney or lawyer is needed, then the buyer or seller will have to pay for the service of drafting the contract. In general, a contract lawyer costs an average of $644 in the US but may charge an hourly fee or a flat fee rate to write the SPA contract.

What is a mortgage contract? 

A mortgage contract is another legally binding document that’s part of the home buying process for all buyers that are financing their purchase with a mortgage loan. However, unlike the SPA contract which comes earlier on in the process, the mortgage contract is a document you sign during closing. The mortgage contract is an agreement between the borrower (the buyer) and the lender that lays out the terms of the mortgage loan used to finance the real estate purchase. 

The mortgage contract consists of two main documents: the promissory note and the security instrument. The promissory note is the agreement that the buyer will pay back the loan and details how it will be paid. It’s usually a standardized form provided by the lender that outlines the terms of repayment. 

The security instrument is lengthier and more complicated, detailing the terms of the property’s ownership. It’s also referred to as the “Deed of Trust” or simply the “Mortgage”. The security instrument defines when the lender can claim the home from the buyer or in other words, under what circumstances the lender can begin foreclosure on the property. Some scenarios where this may occur are if the buyer doesn’t pay back the loan, they can’t maintain home insurance, or they don’t pay their taxes. 

It’s essential that the buyer reviews the documents that are part of the mortgage contract since it is the official and legally binding information regarding their mortgage loan. By signing, the buyer agrees to pay back the loan to the lender under the instructions outlined in the contract.

Mortgage contract: key sections and procedures

The promissory note is generally shorter and usually includes:

  • Loan amount and duration

  • Down payment amount 

  • Interest rate and type of interest (fixed, variable, etc.) including terms

  • Payment amounts and due dates 

  • Specifics on where to make payments 

  • Penalties if terms aren’t met (e.g. late fees or foreclosure) 

The security instrument includes some of the same information as the promissory note but also outlines the responsibilities and rights of the buyer. It describes what a buyer can and can’t do with the home until they pay the mortgage back in full, and what will happen in specific situations, like if the buyer sells the home. As mentioned above, this document is longer and contains more legal language than the promissory note. Possible sections may include: no transfer, insurance, inspection of property, events of default, and survival (successors and assigns). Learn more about sections that are commonly part of the security instrument here

The bank or lender provides these mortgage contract documents to the buyer during the closing process. The deed of sale of the property is also usually signed on this same day. As a buyer, it’s best to employ a lawyer that’s familiar with these mortgage contracts to help you review and understand the specifics before signing. 

Let’s look at which parties must be present during the closing process:

  • The seller 

  • The buyer/borrower

  • The lender

  • The notary - a public official chosen by the borrower to witness the signing

  • The registrar - a public official that registers the mortgage agreement 

  • The real estate agent (if applicable) 

  • The guarantor (if applicable)- a person designated by the borrower to cover mortgage payments if they cannot

  • Any other employed parties (e.g. lawyer, attorney) 

Closing is the last step of the home-buying process. So once the mortgage contract and other important documents are signed, the buyer has ownership of the property.

To sum up

You’re now more knowledgeable about the SPA contract and the mortgage contract, including their importance, key sections, and procedures surrounding these documents. Especially if you’re a first-time home buyer, the homebuying process can be overwhelming and confusing. With resources on the important steps, including property appraisal and title deeds and title insurance, you can become an expert in the process.   

Our team at Kredium is dedicated to helping you from start to finish during the property-buying process. We offer mortgage brokerage services to help US citizens, residents, and non-residents find a personalized mortgage loan that fits their needs. With specialized programs including bank statement mortgages, ITIN mortgages,
DSCR mortgages, and more, we aim to make property ownership possible for all sorts of buyers in the US. On the other hand, if you’re interested in buying a property abroad, we also have you covered with our
international property search and international mortgage brokerage services. Let us help you save time and money by signing up today.

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