Releasing Financing Contingency in Real Estate Contracts

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Releasing Financing Contingency in Real Estate Contracts

Category : Contingencies

May 03, 2016 by Naseer Siddique

A contract is a set of terms agreed upon by two parties. Real Estate purchase agreements are no exception.  The seller and buyer of a home are always interested in negotiating the best possible terms for themselves. According to RealtyTrac, only 31.8% of homes sold in the US in the first quarter of 2016 were bought in cash. The remaining 68.2% were bought through financing. Before a seller accepts an offer, the most important thing he looks at is the buyer’s ability to obtain necessary financing and close escrow within the time frame specified in the purchase contract.  In a seller’s market, like we are in today, there is significant pressure on the buyer to write an offer without any financing contingency or to remove financing contingency within a very short period of time. Once released, and if there are no other contingencies left in the contract, the buyer can lose all of his earnest money deposit if the transaction does not close.

Typically a loan approval that agents or brokers use to release this contingency is the conditional loan approval received from the lender after an underwriter has underwritten the loan file. The word worth keeping in mind here is “CONDITIONAL”. A ‘conditional loan’ approval is NOT a loan approval. What the lender is essentially saying in a “Conditional Loan Approval” is that the borrower’s loan file meets the basic guidelines set forth by the investor for that specific program. The borrower should be able to get the needed financing if all the conditions on the approval list are met AND no additional adverse information about the borrower comes to light before close of escrow.

This is where your Mortgage Broker plays a critical role. An experienced Mortgage Broker is able to look at the conditional loan approval through the eyes of the underwriter and understand the reason why each and every condition is on the list and the best way to address it. Sometimes the documentation provided to satisfy one lender condition can lead to the lender asking for additional documentation, which can change the borrower’s loan approval to a denial. Something that may seem insignificant to the borrower may be very significant from the lender’s point of view. Remember the golden rule- “whoever has the gold makes the rules”. The lending industry operates 100% on this rule. Lenders follow the guidelines set by the investors to the dot. It is like a word of God.

I was recently asked to provide an appraisal to prove the borrower had at least 30% equity in a house that was owned free and clear. I told the underwriter that regardless of what the house appraises for, the borrower is always going to have 100% equity in the house. Therefore an appraisal was not necessary to prove the borrower had 30% or more equity in the house. The underwriter said it is in the investor’s guidelines to document the borrower has at least 30% equity in the departing residence by obtaining an appraisal and therefore she could not waive the condition. Borrowers need to understand that releasing financing contingency based upon conditional loan approval still has risks and does not necessarily mean the borrower is guaranteed financing regardless.

Borrowers should carefully evaluate each and every condition on the approval list to ensure they can satisfy the said condition before putting their earnest money deposit on the line by releasing the financing contingency. Every effort should be made by their mortgage loan originator to provide and obtain clearance of all critical loan conditions before the borrower removes his loan contingency.

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About the author

Personal-BlogNaseer Siddique is a mortgage loan broker with Lakeshore Financial Inc in San Jose, California. He holds a Master’s degree in Computer Engineering and has been originating home refinance and purchase loans for over 29 years.  He can be reached at info@lakeshorefinancialinc.com or by calling (408) 896-4249.