Home Purchase Loan Contingencies…How Do They Really Work

Westcoe Realtors, Riverside California…Unless you have a lot of money (and most of us don’t), when it comes to purchasing a home, you will probably need a loan. And unless you have really wealthy parents, or a friend who has money to burn (again, most of us don’t), then you will go the traditional route and simply get a loan on your new house from a bank.

However, in the real estate version of “what comes first, the chicken or the egg”, do you get your loan first, or do you get an offer accepted and then get a loan? Well, welcome to today’s blog subject…because today, we are going to tell you all about loan contingencies, and how they work to protect a buyer when purchasing a home.

Basically, a loan contingency says that the buyer’s ability to purchase the home is contingent upon the buyer obtaining a new loan from a bank…and that if the buyer cannot get this new loan, then the buyer cannot complete the purchase, and therefore gets their deposit back from the seller.

Seems simple enough…but here come the details.

Understand that the buyer and the seller come at this situation from opposite sides of the coin. The seller wants certainty, and the buyer cannot give any certainty in the beginning. The buyer wants to know that they won’t lose their deposit if they can’t buy the home, and the seller doesn’t want to give the buyer the opportunity to “change their mind” down the road, and use the loan contingency as a way out of the transaction.

As a result, there is the loan contingency clause in a purchase contract.

In the standard Purchase Contract where the buyer is requesting the use of the loan contingency clause, unless it is changed by the buyer and seller, the buyer has 21 days (calendar days, not working days) to get their loan fully approved and ready to go. This means that everyone is on the clock, and the buyer’s lender better be on the ball and ready to rock and roll. It helps if the buyer has done some of the paperwork before they make their offer (to give the lender a head start), but the bottom line is that at the end of the 21 day period, the seller can ask the buyer to remove their loan contingency.

What if the lender is not ready to give the buyer a total loan approval in 21 days?

Well, it can get a little sticky here. The buyer can ask the seller for an extension of the 21 days (maybe they will get it, maybe not, but don’t expect the seller to be happy about it), or the seller can deny the buyer any extension and tell the buyer to either remove the contingency, or cancel the escrow. Some buyers remove the contingency and hope the lender can make the loan happen, and some buyers cancel the escrow. Every situation is different.

Remember…it doesn’t matter what reason the lender has for not being ready in 21 days (unless the seller caused the delay)…if the lender is not ready to give the buyer total loan approval at that time, it’s the buyer’s problem, not the seller’s. This is why the choosing of the lender is massively critical to the purchase process.

What happens if the buyer removes their loan contingency, and then some problems occurs with the loan that makes it impossible for the buyer to purchase the home? EASY…the buyer will most likely lose their deposit. By removing the contingency, the buyer should understand that they are putting their deposit at risk if they cannot fund the loan.

In the end, the contingency clause if there to protect both the buyer and the seller. It gives the buyer enough time (21 days) to get their loan in place, yet offers the sellers some level of certainty after 3 weeks so that they too can make their plans.

Our best advice here…all buyers should start their loan application process BEFORE they purchase a home. As a buyer, you can even get total loan approval up front, thereby making you not only a stronger buyer for any seller lucky enough to have you want their home, but getting “pre-approved” will also eliminate the stress of this 21 day contingency, since 90% of all your work is already done.

Trust us….any way you can reduce your stress level when purchasing a home is a good thing. In the meantime, good luck, and happy house hunting.

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