Contingent on a Mortgage or Cash?
When you are writing an offer to purchase a home in Pennsylvania, the contract document (the Agreement of Sale) requires you to stipulate whether/under what circumstances you will be financing part of the purchase. In the old days, there were two choices . The first was that the purchase was contingent on the buyer receiving a mortgage (and, later in the document, the details of the amount borrowed, percent loan-to-value and interest rate were itemized). The second option was “not contingent” and was understood to mean it was a cash offer.
What is the Risk?
If a buyer had to back out of a transaction that was contingent on financing due to not being able to get the financing as described in the Agreement of Sale, the buyer was entitled to the return of deposit monies. As competition increased for the little inventory available, buyers began to check the box saying the purchase was NOT contingent on financing. For the buyer, it was still necessary to get a loan (the buyer did not have enough cash to buy the property and needed a mortgage to make the purchase). However, by checking that box, it meant that, in the event that the buyer did NOT qualify for a loan and couldn’t settle, the deposit would be forfeited to the seller.
Three Financing Options
The Agreement of Sale was recently updated to add a third option which specifies that the buyer will be obtaining financing but that the purchase is not contingent on the buyer receiving it (thus, allowing the seller to keep deposit monies in the event of a fall through). When buyers want to submit competitive offers, they know that the seller favors those that have the fewest contingencies and many people choose the new option. Remember, I am talking about buyers who have already been pre-approved and have no reason to think they will not qualify for a loan. However, we always have the conversation: what’s the risk level? I don’t want to lose my deposit, but I am pre-approved. What scenarios are there in which I’d forfeit my money?
Why Wouldn’t I Qualify if I’m Pre-Approved?
The most common one is that once the lender begins its due diligence, an overlooked detail is discovered that affects the lender’s ability to provide the loan. Here are some examples:
- You’re self-employed, but have only been for less than two years
- You will be starting a new job but not until more than 90 days from settlement
- Some of your stock options have specific converting rules that disqualify them from counting as an asset
- You have moved from another country and do not yet have established US credit
- You’re in the middle of a divorce or there is a child support issue that is unresolved
Even if everything is in order, if your lender cannot, for some reason, settle by the stipulated closing date, you have technically defaulted. If the seller chooses to terminate the transaction (unlikley, unless he thinks he can get a better offer than the one he accepted from you), he would be entitled to keep your deposit.
How to Strengthen the Pre-Approval
One option to further reduce your risk of not qualifying even after receiving a pre-approval is to ask the lender to “put you through underwriting”. Keep in mind that most pre-approvals are based on your answers to a standard set of questions. It is only once you have an executed contract and formally apply for the mortgage that the lender reviews all of your pay stubs, tax returns, W2s, etc. If you have gone through the underwriting process, it means that all of that paperwork has been reviewed. It also means that unusual situations that could cause problems have been identified and dealt with through a much more rigorous round of questions.
Which Option is Best for You?
The more contingencies you waive, the more attractive your offer is to a seller. However, you have to consider your risk tolerance in order to make the best choice when filling out the Agreement of Sale. If you need a mortgage in order to settle on a property, you will only want to waive the mortgage contingency if you are quite confident you will qualify. Think carefully whether the level of risk is worth losing your deposit over–and how badly you want the house will greatly affect your decision.
If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973
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