Financing Contingencies are a Joke!

The point of a financing contingency is to protect the seller from accepting a contract and finding out right before closing that the buyer can't get financing.  It also allows a buyer to get out of a contract if they are not going to be able to secure financing (although in this day and age they should know this before applying!). My experience is that they no longer operate to provide any protection for the seller; almost all approvals are being made just days before closing in today's market.

Four or five months ago, I started putting a 28 day Financing and Appraisal contingency into my buyer's offers.  The sellers agents didn't balk at this (although 14 days used to be the norm in my area) because the recognized this time frame to be realistic. I have a healthy respect for procedure and I like to think that my offers are both realistic and well-constructed.  Of course, in this current market, even 28 days is not enough. My best case (as a buyers agent) in recent months has been 30 day loan approval---and I think that had less to do with elapsed time and more to do with a shorter amount of time between offer and settlement.

What  I am seeing is lenders are completing underwriting sometime between 1 week and 2 days before closing.  I am being told that a couple of factors are causing this:

1. More conditions on loans requiring applicants to provide more paperwork and then have the loan re-reviewed
2. Procedural changes which will not allow any review to happen until all components can be submitted at once
3. No control over when appraisals take place, with delayed appraisals causing delayed submission of loan packages to underwriting.

As a listing agent, how do we protect our sellers if the financing contingency is no longer going to provide any security?

We need to have an on-going dialog with the buyer's loan officer and agent. We need to be aware of what is causing the delay and why. We need to make sure our sellers understand what is going on in the process. We need to set their expectations about the Financing contingency--and what it can and can't do for them--properly. We need to babysit the loan process like never before.

Yes, once the financing contingency date has passed, the seller always has the right to ask the buyer to remove the contingency or they can invalidate the contract.  Does this serve anyone? In some cases, maybe yes, but when a well-qualified buyer simply cannot get the paperwork to prove the loan is underwritten within an arbitrary time frame--yet they will still be able to close on time--who is going to gain by this? No one!

As a buyer's agent, we are all going to be reluctant to remove the financing contingency until underwriting has agreed to fund the loan...with all that has happend over the past couple years, we are all fairly risk-averse. Our job, after all, is to protect the buyer's interests.

As a seller's agent, we want the contingency removed as soon as possible.

We all have to protect the needs of our clients and it is my opinion, that the financing contingency is no longer providing any protection for sellers. I am wondering what value it still serves other than to make everyone feel good at contract review time.