Loan Contingency

Loan Contingency

Background on loan contingencies (also known as a mortgage contingency)

One of the standard contingencies in an offer to purchase real estate has been the loan contingency or mortgage contingency.

During the first few days, depending on negotiated contract, after acceptance of the offer, the buyer would submit all documents to the lender, have an appraisal, and confirm he or she could get the loan. If the buyer can not get a loan, the buyer backs out of the contract. Once the loan is underwritten, the buyer should remove the contingency.

The new normal for loan contingencies

Since the mortgage crisis, buyers have modified the loan contingency such that it survives until the moment the bank funds the loan. In other words, a seller can be at day 60 in a 60-day escrow, believe closing is near, learn the underwriter rejected the loan, have to start over marketing the home, and not be able to keep the buyer’s earnest money deposit.

Consider, though, buyers want this protection for a valid reason: Obtaining loans in today’s environment is tricky. Buyers fear the bank pulling the rug from underneath them at some point in the process.

Accordingly, we do not fault any buyer for asking for the loan contingency to extend through the loan being funded. We also do not fault any seller for accepting such an offer. It standard in Hawaii Contracts.

How sellers should protect themselves

Nonetheless, we instruct the seller as follows:

If the buyer is asking for a loan contingency to survive through funding, before you accept the offer, ask hard questions:

  1. Why aren’t you they confident in your ability to get a loan?
  2. What is your credit score?
  3. Can you send me a copy of your credit report reflecting that score?
  4. Do you fall into the category of well qualified buyers, i.e., putting down at least 20% of the purchase price in cash?
  5. Can you show me a bank statement that reflects that amount in cash?
  6. Have you been preapproved or only prequalified?
  7. Why have not you been preapproved?

If you as the seller do not see a good credit score coupled with liquid cash to fund 10% – 20% of the purchase price, consider either passing on the offer altogether in favor of another offer, or countering to shorten the loan contingency days. Moreover, require the buyer to get preapproved before accepting the offer.

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