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06.23.20

What You Need To Know About Non-Contingent Loan Approval

If you’ve never purchased a home before, you might not be familiar with a contingency offer. In fact, you might not even understand the offer process at all, so let’s start there.

Step one, you work with a personal loan officer and get pre-approved for a home loan. Second, you find your dream home. Easy enough. Third, you work with your realtor and create a purchase agreement. This is a binding contract that outlines all the terms of your offer.

You sign this and submit the purchase agreement to the seller. Hopefully, they sign it and return it to you, (typically after a little back and forth including counter-offers), Now you have a legally binding deal. Within your purchase agreement, there are almost always contingency requests. So, what is a contingency when buying a house?

In its most basic form, a contingency is a stipulation that certain conditions will be met or allowances made. To put it another way, the purchase agreement, even though it is signed, still depends on things to happen. Perhaps you’ve heard of a mortgage contingency. That’s where your purchase agreement is dependent on the buyer being approved for a qualifying home loan. So what is a no mortgage contingency? Just what you think. It means you’re submitting an offer without a mortgage contingency, which makes your offer more appealing.

Examples of common contingency clauses:

  • Mortgage approval (if not already pre-approved)
  • Closing date
  • Who pays the closing fees and mortgage points
  • How long the buyer has to secure a loan
  • A positive building inspection report
  • The completion of agreed-upon upgrades by the seller

What’s the purpose of contingencies? They primarily exist to protect the buyer.

For example, a purchaser who owns a home right now may not be able to afford to make two mortgage payments. Hence, their purchase agreement states they will buy the home on July 1, providing they can sell and close on their home by August 28. If they don’t sell their home by August 28, they are not obligated to purchase the home on July 1. Of course, this also means the seller is no longer obligated to sell the home to them on July 1, or ever. The deal becomes null and void. But know this: oftentimes a contingency clause is tied to forfeiture of your earnest money, also known as the deposit.

Now you understand what a contingency offer is and how they can be beneficial to you. But, we should also explain why you likely won’t be able to include a lot of contingencies during a competitive home selling market.

A Hot Market Is Not the Time for Contingency Offers

When the home market is slow, or if a home has been listed for a long time, a seller is typically open to a contingency offer. But when the housing market is strong or the home is in a high-demand area, there is virtually no opportunity for a seller to include contingencies in the offer.

This is not a bad thing for you as a buyer. In some ways, removing contingencies can work in your favor. How so?

Every contingency stipulation you include weakens your offer. So removing contingencies will make your offer more attractive.

Say there is a home you want to purchase in a highly desirable area that’s listed for $300,000. Because the market is hot, your realtor may suggest you offer $15,000 above asking price to beat competing offers. However, if you need to include contingencies, you might be advised to make an offer that’s $30,000 above asking price or more to sway the seller. By not having contingencies in your offer, you’re often able to purchase the home with a lower price offer.

Removing contingencies also prevents you from you being a lazy homebuyer.

There was a time people would see a house and have their realtor write up an offer contingent on you being approved for a home loan. This is what we referred to as a contingency mortgage earlier, and generally, it’s a bad idea. A buyer should never begin looking for a home until they’ve worked with a personal loan officer, discussed options, decided how much home they can afford and been preapproved for a home loan.

Rushing in with a home offer that’s not pre-approved can waste your time, the seller’s time, and money. It can also cause a great deal of heartache when you find out the house you wanted to buy was beyond your means.

It is now considered the norm for an offer to be listed as “non-contingent on loan approval.” This statement informs the seller that you are pre-approved or will not need any financing to purchase the home. This can move your offer to the top of the consideration list.

Make Your Strongest Purchase Agreement Offer

Clearly, the best way to strengthen your offer is to remove contingencies. But that’s not the only way you can make an offer stand out. When you are purchasing a home in a seller’s market you’ll want to try these ideas, too.

  • Cash offer: Cash is always king. Paying cash eliminating the mortgage approval process is considered the strongest possible offer a seller can make.
  • Higher percentages of earnest money: If you can’t afford to make an all-cash offer, you might be able to offer some amount of cash upfront, called earnest money or the deposit. This is presented with your offer to help you stand out from the crowd.
  • Handwritten letter: Show your intent to be a good steward of a cherished family home.
  • Waiving real estate contract rights that protect your interests.

Know How to Use Contingency Offers to Your Advantage

If you’re in a buyer’s market, we’d still advise using contingencies judiciously and saving your leverage for the purchase price. But  your personal loan officer and realtor can offer you the best guidance. Ultimately, contingencies are a tool. And with that tool comes compromises. When you work with a personal loan officer and realtor, you can understand what contingencies make sense, and which ones might sour the deal. Do not forgo the use of contingencies in your offer. But do make sure they are important enough to be worth risking having your offer denied.

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