4 min
In a competitive market where inventory is low and demand is high, every buyer is assessing how to make their offer the most attractive. It's no secret that sellers prefer offers that not only provide the best financial upside, but deals that are most likely to close without issue. As such, every contingency that is included in an offer is an additional risk to the seller which makes clean, simple offers with cash most attractive in many cases. So, what do you do to make your offer competitive when you need a mortgage to purchase a home?
Buying a home is a big investment whether it is for personal use or pure investment purposes. The process of choosing and purchasing a home should be a thoughtful process where buyers weigh the risks and benefits. In a competitive market, the speed of those considerations tends to be unnaturally accelerated.
To help protect buyers and sellers, several types of contingencies can be included in a sales contract to mitigate risks. A finance/mortgage contingency is a clause in real estate contract that gives home buyers a timeframe to secure a mortgage loan for a home (typically 30 days). As a part of this, the contract must specific the amount of the purchase that is being mortgaged, the type of loan (conventional, FHA, VA, etc), the date the contingency must be removed and the maximum interest rate the buyer is agreeing to. If the loan that is outlined in the sales contract cannot be secured, and the buyer has a finance contingency, the buyer can walk away without legal repercussions and have their earnest money deposit returned. On the up-front sales contract a date that is in advance of closing serves as the deadline for the buyer to remove the contingency. Depending on whether the contract is on the Florida State wide sales agreement or the Naples area sales agreement, how this contingency removal is handled can vary. But failure to remove it has consequences in both contracts.
One important thing to keep in mind is that the the terms laid out in the contract are the ones used to determine if the buyer has the right to terminate without penalty. For example, say the buyer put in the contract that they were borrowing only 50% of the loan and then they change their mind and pursued a loan to borrow 80%. If the loan is denied for 80%, that denial at 80% does not constitute a contractual right to terminate. They would have to be denied to borrow 50%. So, giving careful consideration to the terms included in the contract is important for protecting buyers.
The reason that finance contingencies are not viewed by sellers as a good thing for them is that they are taking their home off the market for a 30-day period and forgoing other potential buyer offers for a contingency that they have no control over with no guarantee that the purchase will close. In a hot market, this is why many buyers will choose offers without a finance contingency over one with it. Just because you don't have a finance contingency doesn't mean you can't borrow money. It just means that you have not included a contract cancellation opportunity for failure to secure a loan. It is not uncommon for buyers that could pay cash for a purchase to pursue a loan to take advantage of low interest rates. They simply decide they are proceeding with the purchase regardless of whether the loan is obtained or not, removing the risk from the seller.
Buyers will comment "I am pre-approved so my loan won't be a problem." What many buyers may not understand is that the loan approval is not just based on their qualifications as a buyer, but conditions related to the home. Will the property appraise? If it under appraises, the mortgage company will only consider the appraised value for loan amount purposes. So, if they were going to loan you 80% of the purchase price, that now drops to 80% of the appraised value causing the buyer to generate additional cash to make up the difference. And, with that additional cash, it could also change the financial considerations in how the mortgage company now views the individuals financials. The mortgage underwriter also assesses how many rental properties are in the community (the more rentals, the higher risk for default assessed by the mortgage company), how strong the association reserves are (does the association have enough liquid assets on hand to handle unforeseen costs), how shared structures have been maintained and plans for ongoing maintenance, etc. Multi-family units (e.g. condos) may have additional risk factors that the lender may need to assess.
With all of these factors for consideration, there are a number of things that could negatively affect the final, underwriter review process to keep a loan from being approved. With this in mind, if you are considering forgoing a finance contingency to be competitive, you have to be prepared to either (1) pay cash for the purchase if the mortgage is not approved or (2) be willing to loose your earnest deposit if you have to terminate the contract and be vulnerable to additional fees and potential lawsuits.
Making the decision to waive the finance contingency (or any other contingency) should be carefully assessed. Talking this matter over with the mortgage company to understand the risk factors is important. Make sure when you do that you also discuss the areas of assessment for the property to ensure you have the full picture of what the mortgage company will evaluate for final loan approval. I suggest getting that information from not only the front-end mortgage sales officer but the underwriter who actually approves the loans.