1. Most of the time, if you have a documented pre-approval, you will get your mortgage, so a mortgage contingency is not really necessary, right?
Wrong.
It is only unnecessary if:
- You can afford to lose 5-10 percent of your purchase price. The mortgage contingency gives you a date by which you can get that money back, if you cannot close on time because of a mortgage denial or delay.
- You have enough cash to pay for the property without a mortgage, if need be. This may cost you something in lost investment opportunity or fees.
Always remember that there are things about mortgage lending that are out of your control.
Appraisal
Appraisals can fall short of the purchase price because the market is rising. They may fall short because the appraiser is incorrect. They may fall short because you overpaid. An appraisal that is below the sale price can trigger a mortgage denial. Appraisals are not done to support you!
The appraisal is done to protect the lender in the event of foreclosure; they want to be sure that there is equity to pay for the cost of a foreclosure sale. You cannot successfully renegotiate your price based on a low appraisal in a seller-favoring market such as ours. (It is hard to do it in any market!) When markets are rising, lenders are cautious about appraising high, since they want to hedge against approving mortgages that are at the top of an inflationary cycle. View additional details here.
Condo conditions
Your lender can ask about the conditions of the condo association prior to your non-contingent purchase. However, until you get it in writing from the association, there could be errors.
This happened: A lender recently told me of a borrower (not our client!) who waived mortgage contingency for a purchase of an investment property, but was getting a mortgage. The MLS sheet stated a good level of owner occupancy (about 70 percent). However, when the lender contacted the management office, they stated that far less than 50 percent of the units were owner occupied.
Conforming, FNMA (Fannie Mae) mortgages require 50 percent owner occupancy for loans on investment properties, so this new information made the loan ineligible for the FNMA program the borrower was applying for. The loan was denied! Luckily this lender was still able to offer financing to the customer through their portfolio. Had this issue not been discovered early enough to switch loan programs, the borrower would have lost the property. Had there been no mortgage contingency and no alternative loan program, the buyer would have had to pay cash or lose their deposits.
To further complicate things, it later came to light that the condo management company, in this case, had been wrong about the lower figure. The condo project would have been eligible for FNMA financing after all. That would have saved the borrower some money. Precious time was wasted straightening all this out, though. By the time it was discovered that the condo was FNMA-eligible, the borrower was already well down the portfolio path with no time to change gears again without missing the closing date.
In short, weird things happen in the process of checking out condo associations for lenders. If something weird happens, it can cost you big if you don’t have a mortgage contingency.
Economic factors
If you lose your job in the middle of your mortgage process, your lender will deny your mortgage on the ground of inability to pay the loan back. You can lose your job through no fault of you own, when there are economic downturns or jerks in your workplace. I hate to think of it, but the sudden death or disability of a borrower will also cause a loan denial on the grounds of inability to pay the loan back.
2. If I have the cash and my mortgage is not approved in time, I won’t lose much because I can pay cash to buy, then sign the mortgage a couple of days later, right?
Wrong.
You cannot sign your purchase mortgage after you have purchased the property for cash. Once you buy a property, any financing you obtain will be considered a refinance, not a purchase loan – even if you bought the property only yesterday.
If you bought the property for cash and own it free and clear, you will need a cash-out refinance in order to pull some of your equity back out. A cash-out/home equity mortgage is a different loan than a purchase mortgage (and it costs more, btw).
If you pay cash for a property, at the last minute, what happens? Imagine that you have no mortgage contingency, and your mortgage is held up on some problem like the ones I outlined above. You have to close on time or you’ll lose your deposits. First, you’d need to scramble to free up all that cash. Then you would have to reapply and start the mortgage process over. Depending on how much time elapses between your purchase closing and your refinance closing, you may need to pay some or all of your loan fees again.
If you are getting a conforming FNMA mortgage, you would typically need to own for six months before applying for a cash-out refinance. If you want to obtain your mortgage sooner, FNMA does have a “delayed financing” contingency where they allow for obtaining a mortgage after the fact – even in the first six months. This mortgage is complicated by the fact that all the cash used to purchase must be fully documented and sourced the same as it would be for a purchase loan. Depending on the amount of time between purchase and cash-out refinance, this is not always easy. On top of that, some lenders do not allow this exception, even though FNMA does.
___
An Exclusive Buyer Agent can help you navigate these challenges. Find an agent here.
___
