We’ve been talking about contingencies for the last couple of videos. Today, let’s talk about the third and arguably the most critical one if you’re applying for a loan—the loan contingency.
I’ve been seeing this conversation pop up on Reddit, in the comments section on YouTube, in Instagram, really all over the place. I think it’s really important to understand, especially if you’re going to jump into this really hot market. The financing or the loan contingency is a very important piece, especially with some of the volatility we’re experiencing right now in the mortgage world.
What are contingencies, and what is a loan contingency?
First, let’s define what a contingency is. Like I’ve described in previous videos/posts about the appraisal and inspection contingency, a contingency is your escape valve out of the contract. Simply speaking, it gives you a legitimate way to get out and get your deposit back if something happens or something doesn’t happen.
Basically, the loan contingency is encompassing your ability to get financing. So what that means is, if you can’t get a loan because something comes up on your credit, or something changes in the rates and you can no longer afford it, or whatever the case is, you have a legitimate escape clause to get out of that contract and get your money back.
The Question You Want To Ask Your Lender
As you can probably already tell, sellers don’t like it if you have the loan contingency. After all, having it means their entire sale, their entire moving process, depends on you being able to secure a loan. Obviously, that’s not a place that a seller wants to be in, especially in a really strong seller’s market. In this type of market, sellers are often looking for someone non-contingent or someone as close to that as humanly possible.
Now, when you go to write your offer, there is a very important question you have to talk to your lender about before you finalize that offer and decide whether or not to remove a contingency. Ask them: Would it be responsible for me to remove my loan contingency, given where I’m at in the underwriting process?
Tip no. 1: Look for a lender who will fully underwrite you ahead of time.
So what can you do? The first one is to make sure you’re working with a lender who will underwrite you ahead of time. There are pre-approvals and pre-qualifications but those are not good enough to confidently remove a loan contingency. Until you’re fully underwritten, make sure you’re holding on to that loan contingency. Right now, there’s just too much volatility out there right that you might not know what’s going to happen. There’s too much out of your control that could really hurt your ability to secure financing.
More importantly, if you don’t have a legitimate escape clause, your deposit is at risk. Therefore, this is a conversation you need to have with your lender to make sure you’re able to confidently remove this, if you’re going to go that route at all.
Tip no. 2: Make sure your lender actually knows that you want to get fully underwritten ahead of time.
Every time I meet with a buyer, the first piece of homework I always give them is to talk to whoever lender they’re working with. Sometimes, I’ll also refer one of the good ones I know. Then, I would tell the buyer, “Go talk to these guys. Give them a call and tell them about your situation.” Next, I’ll tell them to send their lenders whatever documentation they need, and make sure they’re actually aware that they’re looking to get fully underwritten to be more competitive.
Why is this important? It’s because securing a loan requires you to do a lot of leg work ahead of time to know what exactly it is that you can afford. It is really, really critical that you know where that line is, where it’s no longer affordable and safe, and where the lending world is and how you fit into it. Moreover, if you write an offer without a loan contingency just because you’re trying to be competitive, but then the loan evaporates, or the rates go up so high that it no longer becomes affordable to you, your deposit is at risk.
So make sure you do your due diligence upfront. Keep these tips in mind too until you’re supremely confident that you will get that loan before you make that offer.
NOTE: Getting fully underwritten can take up to two weeks. Plan ahead.
Writing an Offer with a Loan Contingency
However, if you find the house you are interested in and haven’t gotten fully underwritten, that doesn’t mean you can’t write an offer. That just means you’re going to have to write an offer with a loan contingency. Or if you do, you’re rolling the dice. Hopefully, you can shorten it a little bit to make it a little more attractive, so there’s less uncertainty in the whole thing. But ultimately, the most ideal way you’re going to do it is still by getting fully underwritten.
Lastly, prepare for the possibility that you may not win that bid. It’s very possible in this market where all the buyers are getting pre-underwritten ahead. However, above all, make sure you’re protecting yourself. After all, risking your deposit and risking legal jeopardy are just not worth it just to try and be a little bit more competitive. Trust me.
I hope my blog on the loan contingency has helped you.
If I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below.
Here’s to all your success!