Be specific on contingency for financing


November 21, 1993|By Dian Hymer

What is a financing contingency?

Most people can't afford to pay cash for a house. So most purchase contracts contain a financing contingency, which makes the offer subject to the buyer obtaining a loan commitment from a lender.

For your protection, a financing contingency should be specific. It should include the amount of the loan you need; the interest rate you'll accept (in the case of an adjustable-rate mortgage, or ARM, it's the initial interest rate); the number of points (upfront loan fees) you're willing to pay; the term of the loan (usually 15 or 30 years); and the time period you'll need to obtain a commitment from a lender.

A 30-day time period is reasonable unless the refinance or real estate market is particularly active. Check with your real estate or loan agent to make sure the time period you're proposing is adequate.

Financial markets can change significantly during a 30-day time period. If rates were to skyrocket after you signed a purchase contract (unlikely in today's market), and you could no longer get a loan on the terms specified in your contract, you would have legal grounds to cancel the contract.

Protect yourself, but be reasonable. Savvy sellers will object to a financing provision that's unreasonable. In periods of rising interest rates, expect that sellers will want you to agree to accept a slightly higher interest rate, if it's necessary, in order to obtain loan approval.

Most purchase agreements stipulate that you will act in good faith. What this means is that you will make a reasonable effort to get the loan you proposed in the contract. If you are repeatedly turned down for a loan after applying with several lenders, you can probably cancel the transaction and have your deposit returned.

If, on the other hand, you make no effort to get a loan and you fail to complete the purchase, your deposit could be forfeited.

There are two parts to any home loan approval process. First, the buyers must prove they have the means to repay the loan. Second, the property must be appraised by an appraiser designated by the lender, or loan broker, to make sure the purchase price represents fair market value for the property.

Make sure that the financing contingency states that both the buyer and the property must qualify for the loan.

FIRST-TIME TIP: To avoid confusion it's advisable to remove your loan contingency in writing. But before removing your loan contingency from the contract, make sure that you have an unconditional loan approval from the lender. Many loan commitments are conditioned upon additional requirements, such as paying a charge card account down to a zero balance.

If the lender's approval is conditioned upon something that's beyond your control, such as a review of the appraisal of the property, don't remove your contingency unconditionally. Find out how long it will take to satisfy additional lender requirements. Then remove your financing contingency conditioned upon satisfying the lender's extra requirements within the indicated time period.

THE CLOSING: Buyers are often unsure at the time they make an offer of what kind of loan they want. If you make your offer contingent upon obtaining a fixed-rate loan, and then decide to take an ARM, you should have no problem making the change since ARMs are easier to qualify for.

But let's say you specify an ARM in your financing contingency. Then you decide you want a fixed loan but can't qualify for it. In this case you'll have to settle for an ARM to keep from violating the terms of your contract.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif., 94618.

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