Waiving the Financing Condition

This week we’ll be talking about money. Today financing contingency and later in the week earnest money. We’ll be talking about all those cash offers, how it works, and how you could do it too, even if your bank account or mattress aren’t bursting with hundred-dollar bills. We’ll also be talking about risks, and the worst-case scenarios that this option would have.

As I stated previously, during the inspection post, a contingency protects the buyer and in a sellers’ market, sellers are usually looking for offers with least contingencies. However before waiving anything in hopes of making your offer stronger and more appealing in the eyes of the seller, you should know what you’re getting into.

Most people need a loan to buy a home. Some buyers are able to use funds from their investments such as retirement funds to buy their home all cash, and then do delayed-financing after closing to return most of their funds back to where they came from, and then there is a smaller number of buyers that really have a lot of money and truly do not need to turn to a lender at any point of time.

It all comes down to your budget. It all comes down to how much cash you have, and it all comes down to the what ifs. There are situations where waiving the financing condition makes sense and isn’t really that much of a gamble, and then there are times when I as an agent break into cold sweat when thinking of the worst-case scenario, and it isn’t even my money.

A financing contingency protects you as a buyer from a couple of things. It will have your back if your lender pulls out in the middle of a transaction and you are unable to get a home loan. You will still have to meet all the time lines, and do your best to get a loan, and if the worst were to happen, you will also have to be able to show that you did what you were supposed to, and made your best effort, meaning it was truly the lender not you. By the way, shopping for a loan and lender needs to happen prior to signing an offer, not after. Changing your lender or the type of loan product you use could potentially be a breach of contract and put your earnest money at risk even if you had a financial contingency.

This condition will also shield you from the situation where your lender appraises the home at a lower value than the price you purchased it for. What this means is that you agreed to pay $550K for a home, but the lender tells you it’s only worth $500K, and they will only lend you that much. With the financing condition, you would be able to either negotiate with the seller or to call it quits, instead of putting your earnest money at risk or having to dig deeper into your pockets.

So, what happens if you choose to waive the financing condition? Most likely you will make your offer look more appealing in the eyes of the seller as you are telling them that you yourself trust in your ability to get financing. On the other side, you might be putting your earnest money at risk if things were to go sideways.

An offer without financing contingency is considered a cash offer, even if you are depending on a loan or any other contingent funds. So, when you hear those stories about all cash offers, you may indeed just be hearing stories of offers with waived financing contingencies instead of what you’re thinking, as you are most like thinking about a buyer with dollar bills falling out of their pockets. In reality it’s likely a story about those whom chose to take the risk either because their risk really wasn’t that big or because they chose to gamble big time.

Where is the problem then? Where is the risk? You have a steady job, you have a pre-approval or even better, you have been pre-underwritten. Why or when should you NOT waive your financing condition?

Let’s look at this from another angle.

You find your dream home, you make a sturdy offer waiving your financing condition and get your offer accepted way over listing price. The home was listed at a good price, but the sales price ends up being $100K more than what it was listed for. Trust me, this happens, and it happens quite often. You are still within the limits of your budget so you’re good, but are you really?

The lender sends in the appraiser and for one reason or another the appraisal comes down low, meaning the lender thinks the home is not worth what you paid for it. This does not happen often, but it does happen. Once you have waived your financing condition you also waived your protection for a low appraisal, and you would either have to come up with the difference between the appraised price and the purchase price, or you would be potentially walking away from your earnest money.

Starting to sound a bit scary? Well, it should if there are no funds you could tap into, if everything you have is going into the down payment of the loan, your closing costs and the other fees related to buying a home and moving. This is where you really need to weigh the risks, the risk of not getting the home you really want versus the risk of having to walk away from your earnest money because you did not have the funds to close the gap between the sales price and the appraised price.

We return to the spot where I want to make sure you know what you are about to do, and you are accepting the risk with your eyes wide open.