I sometimes get asked about waiving one or all contingencies in a real estate contract, to help make for a more aggressive offer in a competitive sellers’ market. The main contingencies in most real estate contracts are the appraisal contingency, the financing contingency, the termite inspection contingency, and the home inspection contingency. I am not a proponent or an opponent of any of these strategies, but simply want to discuss the pros and cons of each, since it is a question I do get. Let me take these one at a time.
Waiving the financing contingency is something I usually only see done with someone who either has the assets to pay cash for a home just in case the loan approval does not come through, or maybe they have a wealthy family member that has the cash to backstop them in case there is a problem with the loan approval. I will have lengthy conversations with a client about what can go wrong, but in the end you cannot initially predict all the things that can go wrong, so you are going out on a much bigger limb by waiving the financing contingency.
I had two clients married to each other who had high credit scores, 25% down payment, stable jobs and income, everything seemed to suggest their loan was certain. So they waived the financing contingency, along with all other contingencies. One thing that we are required to do at the very end of a mortgage transaction is pull an updated credit report, to double check and see if the mortgage borrower may have opened up new credit since the loan application that may impact their debt ratios. This couple I am thinking of had a rental property in the wife’s name with a mortgage that had a clean mortgage history, but the last minute credit report we pull showed one late mortgage payment on it! When I asked her about it she said, “Yes, that is accurate, we had a dispute with the mortgage company over the property taxes, and one payment was made late a few months ago while we resolved the issue.” This is a big problem, as any existing mortgage that has been paid late in the last 12 months will preclude one from getting a new mortgage. So I told her the options were that they either could not get a loan, which is a crisis when you have waived your financing contingency, or come up with a “Plan B.” After going through the numbers, I realized the husband qualified for a loan on his income alone. So we pulled her name off the loan application, had the credit report redone in his name alone, the loan was re-approved, and we settled. There were a few sleepless nights for these mortgage borrowers.
I have had clients buy a new Mercedes during the processing of their loan, run up their credit card debts buying new furniture, and cosign a mortgage for an employee, all of which could have derailed their loan applications. I found solutions for all those problems, but nonetheless they are good stories to illustrate how you never know what may go wrong with a loan application process, and why you have to think very seriously before you waive a financing contingency.
In the next blog I will discuss waiving the Home Inspection contingency.