THE FINANCING CONTINGENCY OF A CONTRACT CAN BE PLAYED LIKE A STRADIVARIUS!
The FINANCING CONTINGENCY can make or break a Contract of Sale. Read it carefully.
You may just have to eat that mortgage rate!? Make it a tasty one. by Alan May is loaded with great information for agents. Alan writes about the fnancing contingency with a focus and good tip about owner financing.
THE FINANCING CONTINGENCY DOES NOT ALWAYS PROTECT THE BUYER. I have found by reviewing hundreds of contract prepared by agents that the financing contingency is one of the most neglected and least understood paragraphs in the Contract of Sale.
Many agents believe that the financing contingency gives the buyer an easy way out of a Contract of Sale simply because the buyer fails to get loan approval. That's not always accurate. The financing contingency cannot be exercised if:
- The buyer has misrepresented their financial ability to obtain a mortgage.
- The buyer has misrepresented their funds to close.
- Through actions of the buyer, financing a new vehicle, etc., the credit picture has change and the buyer is no longer qualified.
- The buyer has not cooperated with the loan process.
In all of the above causes of loan denial, the seller has a claim on the Earnest Money Deposit.
WHAT INTEREST RATE TO PUT IN THE FINANCING CONTINGENCY? Suppose the buyer has a pre-approval letter than states that the buyer is qualified for a $300,000 loan at 5%. Would you enter 5% in the financing paragraph?
YES, if you're the buyer's agent. Further, you'd cross your fingers and hope the seller accepts the financing contingency with an interest rate of 5%. Sadly, if the buyer's qualification is marginal and interest rates increase while the loan is in processing and the rate was not locked, they are not likely to get through underwriting. I pays for buyer's agents to understand the buyer's financial profile and avoid writing on homes in price ranges up to the limit of the buyer's highest qualifying range. If rates are falling, the risk in minimal. However, if rates are rising or volatile, the contract is at risk.
However, if you're a listing agent, you'd advise your seller to counter the 5% to a higher rate, perhaps 5.5% or 6%. Advising a seller to accept a contract with 5% would mean that, if rates went up,the buyer may not be able to close. If the buyer is only qualified for $300,000 @ 5% and rates go up, the buyer wouldn't be qualified and could exercise the financing contingency.
THE FINANCING CONTINGENCY CAN ALSO PROTECT THE SELLER. It only makes sense that, if a seller receives and offer with a price of $300,000 accompanied by a pre-approval letter that has a 5% rate, the listing agent might recommend that the seller counter the interest rate in the contract to 5.5% or 6% or even 6.5% if settlement is more than 45-60 days future. This is a safe practice for Short Sales. A careful analysis of the buyer's financial statement is recommended if they are customary in your market. At the very least, a discussion with the buyer's loan officer to determine if the buyer can qualify at a higher rate protects the seller.
WRITING OR ACCEPTING A CONTRACT for a buyer that is marginally qualified puts the buyer and seller at risk. When agents understand the intricacies of the financing contingency, neither the buyer, seller nor agents will be faced with a loan denial.
As mortgage financing becomes more difficult, it's important for Buyer's Agents and Listing Agents to pay close attention to the financing contingency and make sure that the buyer is well qualified.
"The offer is good but the buyer's lender's letter is written to today's interest rate. If interest rates go up, the buyer could exercise the financing contingency. I recommend that we counter the interest rate in the contract to 1% higher."
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