Home Buying in San Jose>Question Details

galabing, Home Buyer in San Jose, CA

Should I remove loan contingency?

Asked by galabing, San Jose, CA Wed Dec 12, 2012

I'm in contract for buying a house. For some reason the owners need to stay in there till May, so we agreed on closing in April (because our conventional loan will probably require us to move in in 30 days). On the contract, the loan contingency specifies a date of 12/28, after which we shall either remove or cancel agreement. I'm current working with my loan agent to get appraisals done. He said we will lock rate close to 12/28 and then we can remove the contingency.

I'm a little worried that after we remove the contingency our deposit will be at risk. There is a long span between 12/28 and when we close. By then the lock will have expired and we need to renew it. I'm worried something may go wrong and either cause our loan to be rejected or granted with a higher rate.

I appreciate if you can share your advice, especially regarding the loan approval process, and when it's safe to remove the contingency knowing nothing can go wrong afterwards.


Help the community by answering this question:


I find it hard to believe that your loan approval will not expire prior to the date upon which you plan to close. Your rate lock will certainly expire. You will be looking at a rate that is not guaranteed for a loan that will need to be re-approved. If you think that it is wise to release your loan contingency under those circumstances, I think you are wrong.
2 votes Thank Flag Link Fri Dec 14, 2012

As usual, Charles Butterfield adds good ideas and options for buyers to consider. One caveat on a rent back scenario though: If you are using an owner occupied loan, you are probably signing a pledge to be living in the house within 60 days of closing. If so, and you don't move in, and your contract gives you the option to not move in within that period of time by giving the current owners the possibility of staying past 60 days after closing, your life can become extremely unpleasant. First, the loan may be cancelled and called, leaving you in all sorts of hurt. Second, you've possibly broken a federal lending law, which means a possible conversation with an agent from the FBI you'll wish you never met.

If you are not using an "owner occupied required" loan and paying a slightly higher interest rate as a result and that works for you, then Mr. Butterfield's suggestion may be your best option. You, the seller, and the bank would all be happy. You would be able to work out rent back to everyone's satisfaction. As others have said though, be wary of WHY the seller wants the rent back. Make sure your agent gets ALL the facts as to why the seller needs the extra time. Evicting the seller because he won't move out as promised is never a happy time.

Mr. Butterfield gets a thumbs up from me for articulating a possible solution to your question.

Mitchell Pearce
1 vote Thank Flag Link Wed Dec 12, 2012
Thank you all for your suggestions. To provide a bit more context:
- the seller is being relocated in May and they don't want to move twice (with pets and kids and lots of furnitures), that's why they want to rent back till May
- the reason to close so late is because I'm using a conventional loan (not investment) so have the 60 day (or 30 for some I think) restriction
- I do have a buyer agent and loan agent and I'm meeting them soon (after the appraisal is done, next week), but I wanna learn something before hand, so that I know what to be aware of.

I think the plan is for me to get a lock from one lender, lock it for two months, and renew (with a cost) later, if necessary (eg, the rate goes up), or let it expire (eg, the rate goes down) and lock with a different lender.

I wonder what stages are involved in loan application and what is the "all-ok" (or if there is one) signal that I can safely remove the contingency knowing that I will get the loan.

Flag Wed Dec 12, 2012
What is your agent advising? Since we are not your agents, nor are we privy to your contract we can only answer in general terms.

1) If you remove your loan contingency you risk your earnest money.
2) Your loan interest rates usually are only locked for a certain period.
3) Interest rates change and your ability to qualify can change if rates go up or your income/debt changes.
4) Lenders may not wait that long to close.

Your Real Estate Agent and Mortgage Broker should be discussing the risk to you and giving you options based on what is going on with this purchase.

There are ways to deal with this and your agent should be advising you because you have an agency agreement with them.

All the best to you.
Web Reference: http://www.terrivellios.com
1 vote Thank Flag Link Wed Dec 12, 2012
Thank you Galabing, for your question:

Mitchell Pearce gave you an excellent answer. I agree with Mitchell Pearce that you should not remove your loan contingency. If you will not be closing until April, many things may happen between now and then that may make your loan far more expensive and by that time it is entirely possible that you may not be able to get the financing that you could get today.

I recommend that you consider closing escrow now with a rent back to the seller at your cost to own the home, that is your principal, interest, taxes and insurance (PITI)

That will permit the sellers to stay in the house as long as they pay your costs, and you lock in your loan and interest rates now, and eliminate the interest rate risk and other lending risks that you are exposed to by extending your close of escrow to April.

Thank you,
Charles Butterfield MBA
Real Estate Broker/REALTOR
American Realty
Cell Phone: (408)509-6218
Fax: (408)269-3597
Email Address: charlesbutterfieldbkr@yahoo.com
1 vote Thank Flag Link Wed Dec 12, 2012

In this lending climate, it is never good to remove the loan contingency till the deal closes. Don't take a lock for less than the time necessary to close the deal. You cannot predict when things will settle down in Europe, if a miracle happens in Congress and they get their fiscal act together (Yes that is a long shot, but if it happens rates stay low, and if it does not rates will go up dramatically at some point. You don't want to be unlocked at that point.)

When rates move against you, they move a quarter pint in a day. I've seen them move half a percentage in less than three days. Do you really want to be playing in that game?

Mitchell Pearce
1 vote Thank Flag Link Wed Dec 12, 2012
Talk to you agent to make sure there is a clear understanding why they need to stay until May. Make sure the steps they need to take to move are being followed. If you allow a rent back make sure you address the issue "what if they don't move' with your agent. The last thing you want is the deal with an eviction situation where you have to spend your money to get people out of your house.

Also keep in mind in a normal situation, there is a 5 day period before you close escrow, AFTER the sellers move, to inspect the property to make sure it's in the same condition as the day your offer was accepted. You need to have a plan if you rent back and find damages after you close escrow.

You didn't mention what type of sale this is; regular sale or short sale? I'm assuming it's a regular sale. However, in case it's a short sale I would strongly caution against doing any rent backs. Your agent should be able to tell you why.

As others have suggested, you should talk to your agent and lender to have a clear understanding of the seller's issues and your options.

Good luck and congratulations on getting into contract on a home.

David Sciplin
Coldwell Banker Residential Brokerage
Web Reference: http://www.davidsciplin.com
0 votes Thank Flag Link Thu Dec 13, 2012
Based on your limited information, it sounds like you are concerned that rates will go up higher, you may not qualify for a loan, or something happens that will prevent you from buying this home. You are removing your financial condition/contingency, but you will not close til April. These are all important details that your real estate professional should plan for, and may be a consequence of a fast, seller multiple offer market. Your options are many, but appear to have been condensed to close now (and rent back if you have one) or have a long escrow closing, and you have a long escrow. For a buyer, often times it may be better to close sooner, lock in the rate NOW so you know what loan you will have. That said, the fed mentioned yesterday that the interest rates are likely to stay low and the same so your interest rate going up is a minimal risk. If you closing in April, 3-4 months from now, your appraisal may need to be updated at a cost. Are you financially stable? If so, you and market should be fine and just keep a watch on it. As for risking your deposit by removing all your contingencies, it is not fair, but can be a condition of sale in today's market. What can you do? Renegotiate? Can be challenging, need to be compelling. Consider it a cost of doing business? Not so thrilling. Is it what you already agreed to in the contract? While you can attempt to renegotiate, it is what "you" apparently agreed to so you have to decide if this house is worth it or if it really is a deal breaker for you. With the limited info here, I'd say your risk is minimal as long as you have steady jobs/income, keep credit clean, no major purchases/costs til closing, keep saving, and finally keep in communication with your loan broker and agent. Hope it works out. james@jamesendo. http://www.facebook.com/siliconvalleylifestyles411
0 votes Thank Flag Link Thu Dec 13, 2012
I agree with everyone that you should not remove your loan contingency but keep in mind if you don't its possible they can cancel the agreement if your time frames were not extended when you agreed to a longer escrow.
It appears that the sellers were able to change the contract to their benefit and no one was thinking about yours. When escrow was extended that long the first thing I would have thought of was your rate and having to lock it that long.
If you are forced to remove loan contingency I would walk away. That long if an escrow is a huge risk. I never would have let you agree to change that without something secured for you.
Good luck.
0 votes Thank Flag Link Thu Dec 13, 2012
Not knowing all the details, the short answer is not to remove the loan contingency until the deal closes. If the sellers need to stay until April it is in your best interest to do a rent back to the sellers at your cost.
0 votes Thank Flag Link Thu Dec 13, 2012
While I was working on my answer couple people beat me to the punch... Be careful with rent back. Most bank won't lend you at owner-occupied rates if you are planning to rent back for more than 3 months. That is why I suggest to close around beginning of March.
Web Reference: http://talisrealestate.com
0 votes Thank Flag Link Wed Dec 12, 2012
First - do you have an agent and what did they suggest?

There is so many details that you left out that it is hard to suggest a single solution. Why is the owner selling the house now and needs to stay till May? Do they need the money from you to move out of the house? Why are you doing the loan now and not 60 days prior to closing? It is very unusual that you are planning the escrow to take half a year.

One of the options is to close around March 1st and then rent it back to the current owner till end of May. You can also write an addendum to the original purchase agreement saying that you will get a loan on such and such date with interest rate not higher than such and such and the contingency to be removed at late date.

Get your agent to negotiate!
Web Reference: http://talisrealestate.com
0 votes Thank Flag Link Wed Dec 12, 2012
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