Recently, buyers removed the loan contingency after the lender’s underwriter told their mortgage broker that the loan was approved. Soon after removing the contingency, the buyers found out that the lender required a second appraisal before the loan would be funded.
The buyers’ deposit was at risk if a second appraisal came in at a lower value than the purchase price and the buyers were unable to close the sale, even though the first appraisal was approved by the lender.
This, unfortunately, is not an isolated incident. All too often, underwriters grant buyers’ loan approval and then ask that additional conditions be met before the buyers’ loan documents are issued. For example, an underwriter might want first-time buyers to provide verification that they made their rent payments on time.
As long as the conditions are satisfied, the transaction closes — but delays are common.
Buyers should include a financing contingency in their purchase offer for lender approval of their creditworthiness and of the property appraisal. Some contracts specify a time period for this contingency to be satisfied, such as 14 to 30 days from acceptance.
Other contracts state that the financing contingency remains in effect until the buyers’ lender funds the loan. Lenders don’t fund until all conditions for loan approval have been satisfied. So from the buyers’ standpoint, this is the safest alternative.
A financing contingency that runs until the buyers’ mortgage is funded poses logistical problems for both buyers and sellers. Most sellers don’t want to move out of their home until they’re sure the sale will close, or until it has closed. Lenders usually don’t fund earlier than the business day before closing. So the parties often don’t know until the last minute when they’ll move.
It’s not much different with a financing contingency that has a deadline that falls a week or more before the closing date if the lender requests more information from the buyers at the last minute, which the lenders often do. Buying and selling in today’s rigorous financing environment requires patience and flexibility on the part of all involved.
HOUSE HUNTING TIP: Buyers who need to remove a financing contingency by a certain date should ask the sellers for an extension if their lender grants loan approval subject to conditions that the buyers aren’t certain they can satisfy, like a second appraisal.
Most sellers would grant an extension rather than put the house back on the market if all other contract contingencies have been satisfied.
Contingency-free offers are showing up in some high-demand niche markets, reminiscent of the recent bubble market where buyers made offers with no contingencies for financing, appraisal or inspections in order to outcompete other buyers in a multiple-offer situation.
This is risky, particularly if the sellers haven’t provided a complete disclosure package before an offer is written that includes a home inspection report, wood-destroying pest ("termite") report, and any additional inspections recommended in the home and pest reports, such as for roof, engineer or drainage evaluations.
Recently, there were six offers on a desirable listing in Piedmont, Calif. Two included no contingencies. The only presale inspection report made available to buyers was a "termite" report.
Although there was no financing contingency in the contract the sellers chose to accept, the buyers needed to qualify for a mortgage and the property needed to be appraised for the sale to go through. It was not an all-cash offer.
The sellers had the good sense to add a short inspection contingency and a financing contingency to the contact. They weren’t worried about the buyers’ financial capabilities or the house appraising for the purchase price. The buyers found defects when they inspected the property, but nothing they couldn’t live with.
THE CLOSING: Both buyers and sellers benefited from including the contingencies.