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What You Need To Know About Non-Contingent Loan Approval

November 3, 2021 | 5 minute read

If this is your first time buying a house, you might not be familiar with the term: contingency offer. In fact, you might not even understand the offer process at all, so let’s start there.

Step one, work with a personal loan officer to get pre-approved for a home loan. Step two, find your dream home. Step three, work with your Realtor to create a purchase agreement. Your purchase agreement is a binding contract that outlines all the terms of your offer.

You sign this and submit the purchase agreement to the seller. After negotiations and possible counter-offers, the seller signs the agreement and returns it to you. Now you have a legally binding deal. Within your purchase agreement, there are almost always contingency requests.

A contingency is a stipulation that certain conditions will be met or allowances made. To put it another way, even though the purchase agreement is signed, a few things have to happen for the deal to be finalized. Perhaps you’ve heard of a mortgage contingency. That’s where the purchase agreement is dependent on the buyer (you) being approved for a qualifying home loan. 

A “no mortgage contingency” means you’re submitting an offer without any contingencies, which makes your offer more appealing.

Examples of common contingency clauses:

  • Mortgage approval (commonly used when borrower was not 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

Contingencies primarily exist to protect the buyer, so a seller isn’t typically fond of seeing contingencies in an offer.

For example, a purchaser who owns a home right now may not be able to afford to make two mortgage payments. So their purchase agreement could state that they will buy the new home on Aug. 1, providing they can sell and close on their current home by July 1. If they don’t sell their home by July 1, they are not obligated to purchase the home on Aug. 1. Of course, this also means the seller is no longer obligated to sell the home to them on Aug. 1, or ever. The deal becomes null and void. A financing contingency clause allows the buyer to a refund of their earnest money (also known as the deposit) if the borrower is unable to obtain financing.

Now you understand what a contingency offer is and how it can be beneficial to you. There’s a catch: when the market is competitive, you likely won’t be able to include a lot of contingencies in an offer.

A Hot Market Is Not the Time for Contingency Offers

When the home market is slow, or if a house 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, it is more difficult for a buyer to include contingencies in the offer.

In some ways, removing contingencies can work in your favor. Because every contingency stipulation weakens your offer, removing contingencies will make your offer more attractive.

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

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

Make Your Strongest Purchase Agreement Offer

The best way to strengthen your offer is to remove contingencies. But there are other ways that you can make an offer stand out. When you are purchasing a home in a seller’s market, you’ll want to try:

  • Cash offer: Cash is always king. Paying cash eliminates the mortgage approval process and 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. A deposit presented with your offer will help you stand out from the crowd.
  • Handwritten letter: Show your intent to be a good steward of a cherished family home.
  • Contingencies: Discuss with your Realtor any contingencies that may be in your offer which you could potentially waive.

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 if you use them, make sure they are important enough to risk having your offer denied.

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