Home Buyer 101: Financing Contingency

Continuing on in our educational journey to teach readers about the financing contingency. Let me start this article by saying, WHO YOU CHOOSE AS YOUR LENDER MATTERS. In our market in particular, I always recommend a local lender. There are many reasons this is the case, but here are my top five:

  1. A local lender is able to get you into underwriting and conditionally approved for your loan much faster than a large bank or credit union (same with appraisal).
  2. A local lender is able to close your loan much faster and is less likely have to have delays before settlement.
  3. A local lender is easy to reach over the weekend when you will need a pre-approval letter.
  4. A local lender is likely part of a company that is recognized by local agents and respected, therefore giving you a leg up when submitting an offer.
  5. A local lender will be your advocate, and can work with you and be creative in your financing to make you more competitive.

Why do I mention all of this? Because as tempting as it may be to work with your big bank or credit union, in a competitive market this will severely hinder your chances of winning in a multiple-offer situation.

Now, let’s dive into the specifics of the financing contingency. For NVAR, GCAR, and MAR (the three different trade association that represent the jurisdictions and provide the standard sales contracts) there is a specific addendum that addresses a buyer’s finance contingency. Within this same form, there is a portion for the appraisal, but we will cover this another day. You, as the buyer, along with your lender, will need to determine how many days you need to get the loan application completed, loan documents signed, and to get your file into underwriting to receive a conditional commitment letter. A good local lender should be able to do this in 14 days at the very most (most of my preferred lender can do it in 10 or less). What does the conditional commitment letter include? Well, its name says it all – It’s an approval letter but with the conditions that are still necessary to receive the final clear to close on the loan.

The key here is it matters how many days you will need in order to do all of this. The faster you and your lender are able to do so, the more competitive your offer is going to be. Keep in mind, with this contingency you are really at the mercy of how quickly your lender is able to get your file through underwriting, hence why it’s important to work with someone who is local and can move fast.

All this being said, in our market it is common for buyers to waive this contingency entirely to be competitive. If you remove this contingency, you are waiving your safety net to back out of the offer if you aren’t qualified for your loan. It is extremely important that you have a conversation with your lender before making this decision to assess how well qualified you are for your loan. If after this conversation you feel you are in a good spot to waive the contingency, then it is certainly something to consider in a competitive situation.

Now, let’s hop back to the language included in the sales contract for the financing contingency. Particularly in the NVAR contract, which is used in Northern Virginia, there are two different options for your finance contingency – “automatic extension” and “automatic expiration.”

Let’s use a hypothetical to make this easier to understand. Say you put in an offer and included a 14 day finance contingency. If you chose automatic expiration it is pretty straight forward and the contingency expires after the allotted days, meaning you no longer have the opportunity to void the offer due to financing. On the flip side, if you chose automatic extension the contract says that you have 14 days to deliver a conditional commitment letter. If the letter is not delivered during that time, the contingency automatically extends. For my buyers, I try and keep the financing contingency in place as long as possible by not delivering the conditional commitment letter unless requested. That said, there are a few ways this scenario can play out if the letter is not delivered during the specified period. The first is that the seller never requests the conditional commitment letter and your contingency continues up through settlement. The other option the seller has, per the contract, is to deliver Notice to you, the buyer, giving you three days to select to void your offer. If you do not void during this time, the contingency is removed and the contract continues on in full force. This is a tough position for a seller because if they do decide to deliver Notice, this gives the buyer the opportunity to back out of the offer without evidence that they wouldn’t be approved for the loan. For this reason, a seller will usually request automatic expiration, and this type of financing contingency is most common in our competitive market.

Which leads me to my final point. What happens if you really won’t be approved for your loan and you are able to void the offer on financing? Simply put, your lender will need to provide a letter stating that you are not qualified for the loan.

Jam packed content included here, but good to know when determining what your best options are for the financing contingency.

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