I think this topic is important. A financing contingency is not something to take lightly. I know buyers will balk at a developer's contract when they won't allow a financing contingency, and rightly so. You need to take advantage of all the tools at your disposal when buying real estate, especially in today's market.
Bob Harris gives some good advice to home buyers considering buying distressed property. However, when it comes to removing the financing contingency in an offer, buyers need to understand the risks.
WHAT IS THE JOB OF A BUYER'S AGENT?? We are engaged to help home buyers "find the house"?? Of course, but so much more. When preparing a Contract of Sale, home buyers often rely on the advice of the agent about the meaning of the paragraphs in the Contract. Agents MUST be careful and give the buyer the agent's best advice to protect the buyer. Experienced agents learn through experience that what may appear simple in contract language may put the home buyer at risk.
THINK TWICE ABOUT THE FINANCING CONTINGENCY. The Financing Contingency is a paragraph in most Contract of Sale forms in the U.S. I have learned from experience to never, never, never advise a buyer to remove a financing contingency.
THE SELLER PREFERS OFFERS WITHOUT A FINANCING CONTINGENCY. It's fairly routine these days for for banks, sellers and listing agents to expect that the financing contingency in a Contract of Sale will be removed as satisfied once the home buyer has been fully APPROVED for financing. RISKY, RISKY.
APPROVED What does that mean??
The buyer has a letter that says the buyer is "Pre-Approved". Based on this letter, the agent advises the buyer to write the Contract of Sale without a financing contingency. The agent knows that the absence of the financing contingency will make the offer more appealing to the seller. However, this is very risky advice. It puts the buyer's earnest money at risk.
Pre-Approval letters have "conditions" that protect the lender. Most pre-approval letters have contingencies, conditions or disclaimers sufficient to protect the lender if the loan is not finally committed or funded and settlement doesn't take place.
If the lender's Pre-Approval letter includes contingencies that protect the lender, why would a buyer remove the financing contingency that protect the buyer?
"BUT LENN, IF THE LOAN IS PRE-APPROVED, DON'T WE KNOW THAT IT WILL CLOSE???" NO, NO, NO, you do not. What are some of the conditions that would prevent a loan from closing?
Change in the buyers financial profile through conditions totally out of the buyer's control, such as:
- family tragedy
- loss of job
- reduction in income
- reduction in credit score
- loss of co-borrower
- low appraisal
- underwriter refuses to approve
- underwriter requires supporting appraisal
- lender doesn't provide FIRM COMMITMENT timely
- home inspection reveals serious defects without a home inspection contingency
- lender requires document(s) that borrower cannot locate timely
HOW IS THE BUYER AT RISK WITHOUT THE FINANCING CONTINGENCY? Once a property is Under Contract with no contingencies:
THE LISTING AGENT IS LIKELY TO:
- cease to market the property for sale
- cease advertising the property for sale
- change the status in the MLS to something other than ACTIVE
- remove the key access or combo access to the property
THE SELLER IS LIKELY TO:
- make moving preparation
- accept another job out of the area
- remove the property for sale from the market
- cease to show the property to prospective home buyers
- make financial commitment on another property
I'm not an attorney and I'm not giving legal advice. I don't have to be. Seems to me that if an agent is giving advice to a buyer/borrower about whether or not to remove the financing contingency, they need to think carefully about the risks to the buyer of that advice.
WHAT DOES THE FINANCING CONTINGENCY MEAN TO THE SELLER? IT ISN'T OVER TILL IT'S OVER. If the home buyer defaults, meaning doesn't close, the seller has lost opportunity to sell and may have incurred DAMAGES. The contract clearly puts the home buyer's EARNEST MONEY DEPOSIT at risk if the contract of sale doesn't close FOR ANY REASON if there is no FINANCING CONTINGENCY to protect the buyer/borrower.
RISKY ADVICE!
"Since you've been pre-approved, you don't need the Financing Contingency."
AGENTS AND BROKERS SHOULD PRACTICE "RISK AVERSE" REAL ESTATE BROKERAGE. Contingencies in contracts are there to protect one party or another. The financing contingency protects the home buyer from the loss of their earnest money deposit in case the sale doesn't close as a result of the inability of the buyer to obtain financing.
Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, Serving home buyers in Maryland and Northern Virginia.
Great advice, most don't think of the lender with all their protection. Everyone is always protecting or CYA, make one wonder how we get any deal through.
This is very good advice for all Buyer's Agents to heed. The "Financing Contingency" is your one "ace in the hole" which can provide your Buyer "protection" in the event that an unforeseen financial catastrophe presents itself.