Contingencies

B - Financing Contingency: What should you know about it?

Your home is essentially off the market during the time needed for the buyers to obtain financing approval. Be aware that most contracts (unless it’s a cash offer) are contingent on the buyers’ ability to obtain financing. 

Pre-qualified, pre-approved and approved:

The degree of loan approval assigned to buyers is stated in a sort of status terminology. The lowest level is “pre-qualified” to buy. This means that the buyers are qualified to buy up to a certain amount based on information they provided, but that has not yet been confirmed.

The next level up is being “pre-approved.” This means that key elements of the buyer-supplied information has been verified and looks good. The highest level of loan qualification is being “approved” which means that all documentation; job, financial and credit history has checked out and the buyers’ have been given the OK for the loan.

With today’s technology, lenders can provide a pre-approval letter shortly after the buyers have made formal loan application. It’s important that your buyers have this level of financing approval; otherwise you’ll suffer a lot of lost marketing time should their financing prove unacceptable a few weeks into the contract.

At some point before closing, the lender will advise you that the buyers have been “approved” for the loan. The lender will almost always specify “approved, but subject to the appraisal.” This means the loan is still subject to your home passing the appraisal.

Maximum interest rate:

In the financial contingency portion of the contract offer, the buyers will often specify the maximum interest rate acceptable to them when applying for the loan.

For example, if the current rate is 6 percent, the contract may be written to specify that the maximum interest rate acceptable to them is 6 or 6.25 percent. If the market jumps above the limit they specified, the buyers can opt out of the contract. This could be their choice or it could be because they would no longer be able to afford the loan payments.

It benefits the buyers to agree (lock in) to the current rate to avoid this possibility. Some buyers don’t, as they hope the rate goes down before locking it in.

If the maximum interest rate amount specified in the offer is approximately the same as the rate lenders are currently charging, negotiate to have this increased by a half of a percent. In other words, if the buyers say 6 percent is the maximum rate they will accept (and it’s the current rate), you should counter at 6 ½ percent. This will protect you from a sudden increased change in the rates (but not above 6 ½).

Some buyers will specify “current rate” on the offer to purchase, instead of an actual percent figure, which eliminates this problem.

Cash buyer wants appraisal:

You may run into experienced buyers who follow through on obtaining their preapproval, making them aware of exactly how much they can afford to buy. Armed with this knowledge, the buyers, who may be putting down a large amount and financing a smaller amount, could bid on your home as a “cash buyer.”

In other words, they omit any contingency on financing which gives them the appearance of being very strong buyers. This is legal and acceptable in most markets.

Even in this “no financing contingency” situation, buyers may include a stipulation in their purchase offer that the home must appraise to the selling price.

Cash buyers usually don’t get an appraisal. Although they'll cross out the financing contingency, they may specify that your home must appraise to the selling price. If so, ask them how much money they plan on putting down. A down payment of a 30 percent or more of the sales price will rarely produce an appraisal problem.

Financing contingencies will state that the buyers will be seeking a mortgage for “xx” period of years. The length of their loan period doesn't affect you.

NOTE:  Some contracts state that you can arrange to secure financing for the buyers if their financing source falls through. This option is rarely ever pursued. If a lender won't extend them credit, why would you?