Do you have a plan to purchase a home? Are you feeling overwhelmed and unsure of what the process might entail? Have you heard about loan contingencies but wonder what they are and how they may impact your goals? If so, then this blog post is for you!
Loan contingencies can be confusing and intimidating – but with the right knowledge, partnering with an experienced real estate professional, and careful planning, these contingencies don't need to keep you from achieving your goal.
By understanding what a loan contingency is -and how it fits into the larger picture when buying property-you can make educated decisions that get one step closer to owning something truly special.
What Does Loan Contingency Mean
A loan contingency is an agreement between the buyer and seller of a property that allows the buyer to secure financing for their purchase. If the buyer cannot get approved for a loan, they can back out of the contract without legal repercussions or financial penalties. The terms of this contingency will be laid out in the purchase agreement, including details such as the type of loan being sought and the amount of time allowed for loan approval.
A loan contingency can be invaluable for buyers who want to ensure they will not be put into an unfavorable financial position if their loan application is denied or delayed. It gives buyers extra peace of mind knowing they have some security if something goes wrong during the home-buying process.
As a result, loan contingencies are an important part of any home purchase agreement. It is always a good idea to ensure that all the details are clearly outlined to protect both parties involved.
What Is the Difference Between an Active and Passive Contingency
An active loan contingency requires the buyer to take the initiative and action to meet certain conditions that must be fulfilled before the home purchase is finalized. For example, it may require the buyer to obtain a pre-approval letter from the bank and provide proof of funds, or it may involve obtaining a home inspection report.
On the other hand, passive loan contingencies are generally situations in which another party's actions or inactions can stall the home's sale. One example of a passive loan contingency would be if there were an issue with a title that needed to be cleared up before closing, such as a lien or another encumbrance. In this case, it may not be within the buyer's control, and they must wait for the other party involved to resolve the issue.
How Does A Loan Contingency Work
A loan contingency is a clause that real estate contracts often include, which requires the buyer to obtain financing to finalize the sale of a home. This clause means that the seller will only accept the purchase agreement if it is contingent on the buyer's ability to secure a loan. The purchase contract is only valid if the buyer can get approved for a loan or receive suitable terms.
To ensure that both parties are protected, loan contingencies often require buyers to provide proof of loan pre-approval from a lender within a certain time frame. This proof ensures that buyers and sellers know whether or not they will finalize the sale in advance, protecting all parties involved. Additionally, loan contingencies can also contain stipulations regarding down payment, appraisal requirements, and other necessary details of the financing process.
Is It a Good Idea to Waive Your Loan Contingency
In most cases, buyers should exercise caution when considering waiving their mortgage contingency.
Without a contingency, buyers are taking a significant risk, as their financing may not be approved, and they can lose their deposit if the loan is not ultimately obtained. Homebuyers should weigh all their options, including pre-approved for a loan, before starting the home purchase process to ensure their finances will be accepted in time.
Additionally, buyers should always work with an experienced real estate agent to help them navigate the process and with their lender to ensure they understand all contingencies. If a buyer is confident in their financing and ready to commit, waiving the loan contingency may be an option. However, it should not be done lightly; buyers should always proceed cautiously.
How Long Does It Last
A loan contingency is typically a time-limited clause in the purchase contract that states the buyer must secure financing within a certain amount of time. The lender usually determines this time frame which could be anywhere from 30 to 60 days or longer. It's important to note that if you miss this deadline, the seller can legally terminate your agreement and keep your earnest money deposit.
Understanding Your Rights
As the buyer, you have certain rights when it comes to contingencies regarding financing. For example, should your loan application be denied or changed during the loan period, you can renegotiate with the seller for better terms without losing your earnest money deposit protection.
Having a loan contingency provides extra flexibility should you need to back out of the deal. If your credit score drops or you can't secure the amount of financing needed, then with a loan contingency, you can terminate the agreement and receive your earnest money back.
What Is Contingency Removal
Contingency removal is an important step in the home-buying process. A loan contingency is a clause that protects buyers from being obligated to purchase a property if certain conditions regarding their financing are not met.
This step means there may be delays or changes in the closing date if the buyer's loan application is not approved or cannot secure the desired interest rate. The purpose of a loan contingency is to provide the buyer with time to obtain appropriate financing and renegotiate terms to save money on the purchase price.
When it comes time for removing contingencies, this involves taking action on any financial commitments made during negotiations, including having documents submitted and checked by lenders and other third parties involved, such as home inspectors.
In addition, the buyer should also make sure to check their credit score and overall financial health to be prepared for any last-minute changes that may occur. Once all paperwork is complete and approved, the loan contingency can finally be removed from the purchase agreement, allowing the transaction to move forward with a clear path toward closing. The buyers must do this within an agreed-upon timeline set out during negotiation or otherwise specified in their contract.
FAQs
What happens after loan contingency?
Once your loan contingency has been met, you are ready to close on purchasing the home. Sometimes, the seller may agree to an extension for closing if needed. Your real estate professional can help explain what might be involved in a particular situation and provide guidance to ensure everything is completed according to plan.
What is the difference between a loan and appraisal contingency?
A loan contingency is a clause in the purchase contract that states the buyer will have to obtain a mortgage loan of at least a certain amount for the sale to go through. An appraisal contingency is typically added to verify that the home is worth at least the agreed sales price.
What happens if the appraisal is higher than the offer?
If the appraisal comes in higher than the offer, then it is likely that you will not have to go through with a loan contingency. In this case, you can negotiate for a lower purchase price or better terms of sale with the seller. Your real estate professional can help you weigh your options and decide what might be best for you.
Conclusion
Loan contingencies can be complex and important, so everyone buying a home should understand their basics. A loan contingency helps protect buyers if they cannot obtain a mortgage, so it is obvious why they should only waive them if they think twice. While you must ensure that your contingency adheres to all relevant laws and regulations, understanding your rights is key.
