loan contingency

Asked by Hollie, Tracy, CA Mon Nov 29, 2010

If we only got conditional approval, can we remove loan contingency?

I heard somebody got rejected last minute. Do we have any option to keep loan contingency until it fund?

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Steven Ornel…, Agent, Fremont, CA
Mon Nov 29, 2010
Hi Hollie,

“If we only got conditional approval, can we remove loan contingency? “

In the present state of mortgage financing, there are three types of loan conditions:

1) Prior-to-doc (PTD) conditions are those that must be satisfied before the lender’s underwriting department will generate and send loan docs for you to sign at escrow.

2) Prior-to-fund (PTF) conditions are those items that must be satisfied before the investor will “push the button” to send your new loan funds to escrow.

3) My “favorite”, Last-minute-demands (LMD) are conditions derived via comprehensive rectal extraction!

To be proactive regarding #1 & #2, I would ask for the lender-specific list of PTD/PTFs generated by underwriting and go over it with your Realtor® and mortgage contact.

To address #3, personally, in this financing market, I would not remove a loan contingency until the funds hit escrow. However, you should be completely upfront with the Seller about this. Have your Realtor® speak with the Listing Agent before writing an offer and check the box Andrea suggests located on page 2, Para H(3) of the CAR Residential Purchase Agreement (loan remains a contingency until funded). Keep the channel of communication open between buyer/seller regarding loans status.

The only thing that remains FIXED regarding financing is that everything is VARIABLE!

Best, Steve
1 vote
The Medford…, Agent, Fremont, CA
Mon Nov 29, 2010

Here is an excerpt from a recent blog post of mine that deals with this issue and it’s larger implications:

Buyers Balking – Five Key Reasons, Two Significant Results

“In addition to tougher requirements in securing a loan, there’s another serious lender-backed change occurring. In my opinion, this change is more ominous. Underwriters now check borrower’s information multiple times throughout a transaction. In addition, they are adding stiff property guidelines. This can easily happen three times during an escrow and by three different underwriters. And no two underwriters are looking for the same things, so demands can be very different from underwriter to underwriter. Many requirements come very late in the transaction and can cause significant delays and/or unexpected expenses to either party. Other requests simply kill the deal outright.

It’s become very similar to navigating a minefield blindfolded.

As a result, the odds of successfully closing an escrow have fallen dramatically. In a recent discussion with Kim Silva of Chicago Title (in Fremont), she emphasized, “Banks keep piling on requirements at the end of closings. Consequently, escrow failures are way up, causing severe frustration and confusion on behalf of all parties involved.””

SO … I TOTALLY understand buyer’s reluctance to remove the loan contingency prior to funding. We’ve had a number of deals where banks literally stated it was OK to remove the contingencies, then changed the playing field with increased conditions AFTER we’d removed contingencies. We’ve discovered that currently, at least in our experience, big box lenders are the worst – especially Bank of America. A good relationship with the loan office is NO guarantee that the loan will make it through underwriting – it’s like a black hole from which emergence is not guaranteed no matter how good your initial prospects may appear.

Ironically, more and more big box loan officers are REFUSING to tell us whether or not we can remove contingencies. They don’t want the imputed liability that goes along with telling us our loan is now “good-to-go.” If a loan officer will not / cannot tell me I can remove contingencies … I won’t.

For this very reason we try VERY hard to convince our buyers to go with our lender: he works for a lending institution that (1) has a pool of reputable appraisers and (2) they work directly with underwriting all the way through the process. There are no surprises. And he will tell me clearly when I can remove contingencies. And once I do, I know we are good to go.

Here is a post that explains a bit more:

I WISH You Would Use My Lender - 6 Critical Reasons Why You Should
1 vote
Andrea Wince…, Agent, Milpitas, CA
Mon Nov 29, 2010
Hi Hollie, on the California Residential Purchase Agreement (RPA-CA) Page 2, Paragraph H(3) under Loan Contingency Removal, buyers (when offering) have the opportunity to checkmark the box that says "the loan contingency shall remain in effect until the designated loans are funded." Look at your contract and see what it says. Whatever was written and fully executed and agreed between buyer and seller will give you your answer. If you don't understand your contract, ask the Realtor who wrote it for you, to explain. Kind regards.
1 vote
Jeanne Feeni…, Agent, Basking Ridge, NJ
Mon Nov 29, 2010
I think it unlikely that the seller will allow the mortgage contingency to remain until the deal is funded. Generally you lift the mortgage contingency when the commitment is given and the seller is on pins and needles until that commitment comes through. Absent a crisis like a job loss, you should be in good position to close. This assumes that you are cooperating in every way and providing the bank everything they request in a timely fashion. There was likely an explanation for why the loan was rejected last minute, you may want to inquire about that to put your mind at ease. Also, talk to you banker and your agent to express your concerns - and primarily with your banker, ask all is in order.

Good luck to you,
Jeanne Feenick
Unwavering Commitment to Service
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1 vote
Emily Morgan, Home Buyer, New York, NY
Fri Jul 6, 2012
The need for a “loan contingency clause” and its acceptance by the seller as a condition for the property’s sale depends upon numerous factors consisting of real estate market conditions (strong seller’s market, strong buyer’s market, strong lender’s market or the opposite of these examples), the appraised value of the property, the amount of the loan, and the financial strength of the buyer. For example, in a strong buyer’s market, the seller is faced with few offers for his property at the price desired and consequently will be more willing to accept a loan contingency as a condition for the sale as opposed to a string seller’s market where the seller is faced with multiple offers to purchase typically above the initial asking price.
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Dallas Texas, Agent, Dallas, TN
Mon Dec 6, 2010
Person answer all your questions is your mortgage broker who is responsible of your file. Any statement made without involvement with your loan file could be misleading answer AND not on your behalf.

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
0 votes
Grace Hanamo…, Agent, Cupertino, CA
Mon Nov 29, 2010
Hi Hollie and thanks for your post.

You've got a lot of great advice below, but in the end, it all boils down to "what does it say in your contract." If the you and the agent wrote the contract to have the contingency removed in the standard 17 days, you may have to ask for an extension if your mortgage broker or lender is not comfortable recommending that the contingency be removed at the deadline. However, if your contract specified that the mortgage or financing contingency would remain in place until the loan is funded, you need not worry about removing this contingency now--given the circumstances of this transaction, though, it's unlikely that your original purchase contract allowed for an extended period to remove the financing contingency.

Again, since you are using the listing agent as your agent, or "dual agent", you may find that the help you would normally get from a buyer's agent will be limited because the agent is representing both sides of the transaction. I know I've mentioned it before, by not employing your own agent to assist you, this will necessitate your working more closely with your mortgage broker to determine when you can safely remove the loan contingency. If you need more time to remove the contingency, contact your agent to execute and present an extension to the Seller to allow for additional time to attend to any issues that the lender may require to solidify your loan. Here's where you might use some of those "negotiating points" I mentioned in a previous post in your favor.

Good luck! If you have any questions about the contract, it's best to seek qualified legal advice from a real estate attorney.

Grace Morioka
Area Pro Realty
0 votes
Michael Robe…, Agent, San Ramon, CA
Mon Nov 29, 2010
Hi Hollie, I try to make it much more simple than is necessarily the common practice, lately. Mind you, I have already made it inherently clear to the seller's agent, this starts from the first moment the offer is accepted, that we will not be removing the appraisal contingency until the loan is funded to cover the late appraisal review and when the loan contingency IS removed it is subject to the buyer's ability to meet the late micro conditions.

Most listing agents find this agreeable opposed to having to cancel the contract. This allows for flexibilityand everyone is aware for the need to be flexible. Like Mr. Medford mentioned "..navigating a minefield blind.."

The point is to remove the loan contingency with a "subject to" declaration. Simple. Just like an 'easy' button.

0 votes
John Dutra, , Fremont, CA
Mon Nov 29, 2010
If this had been just a couple of years ago, I would have said you were okay to release contingencies, but for most situations today, I would recommend not releasing loan contingencies until all conditions are met and cleared if possible.

The issue today is that some lenders today will readily approve a loan and just as easily deny it very late in the transaction. While I have not seen this personally, I have heard countless stories where this has happened and cost the buyers their deposit along with inspection and appraisal costs as well

From personal experience, the best way to ensure the safety of clients is to first and foremost review all documentation upfront, asking for a comprehensive list of what lenders look for in a loan package. Then, what we like to do is have 2 processors review the exact same package prior to sending that on to the underwriter. The reason is simple. If I can eliminate any question with regard to the qualification of the client upfront, the underwriter will generate fewer conditions for our clients. Then, with limited conditions, or none at all, everything has been done to cover the buyer to greatest extent possible.

That said, the loan consultant should review conditions with you - specifying any that could cause concern. If the conditions are generic, few and simple to complete, it may be okay at that point to release conditions. A lot will depend on the seller's ability to work with you should you take longer to release than the contract will allow.
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Kevin Vo, , San Jose, CA
Mon Nov 29, 2010
Sometimes it takes a buyer longer to fulfil certain conditions. I have worked with a buyer who got conditional approval for her loan. I asked for 2 extensions and it turned out to be ok. You need to be careful and ask for a written explanation from the lender. The lender will tell you if the conditions can be met. More importantly you need to work with your agent and your loan officer before removing contingency.
Best of luck,

Kevin Vo
San Jose Realtor
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Lieu Vu, , San Jose, CA
Mon Nov 29, 2010
If you got loan conditional approval, my advise is "DONOT REMOVE LOAN CONTINGENCY". You still have alot of conditions require to complete the loan.
Best of all, talk to your loan officer.
Best of luck to you
0 votes
CJ Brasiel, Agent, San Jose, CA
Mon Nov 29, 2010
Hollie -

This is a subject that is getting more and more attention because underwriters are seemingly making the rules as they go. It use to be that the loan officer would give the client an all clear to release contingencies with some of the last minute conditions (i.e. verification of employment). However, I have had a couple of deals that they said "all clear" and then underwriter continues to add conditions as they receive documentation, updated pay stubs, the like. In my opinion, releasing a contingency before docs are drawn is becoming riskier and riskier. Since it is my client's earnest money deposit at risk, I am not sure it is worth it.

I will be interested to see what others say about their experience in this regard.

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Terri Vellios, Agent, Campbell, CA
Mon Nov 29, 2010
What does your contract state? If you wrote in funding condition until closing then it can stay. In today's market I explain the situation to both buyer and seller and push for this to remain in place in the contract where possible.

If your transaction has been moving along well with this exception, I would encourage your agent to discuss this with the other agent and see if you and the seller can agree to keeping it in until funded. Sellers really don't want to start the process over again. They also don't want to be left hanging out to dry to the end either. Giving them some confidence as to the delay and your motivation to close is necessary.

Yes, I've heard of several things happening at the end, lending changing, mortgage insurance company not approving, etc.

Good luck.
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0 votes
Michael They, Agent, Campbell, CA
Mon Nov 29, 2010
Hi Hollie,

Try to keep your loan contingency as long as you can but usually it stated in the CAR form, you have 17 days to remove your loan contingency, after 17 days you need to ask for an extension. It is safer that way, it will then depend on your seller if they want to extend it or not, but these days most seller are more motivated and I think they will do it. On the other hand, if you have decent credit score, more down payment on the purchase, I thin you will be fine.
Your loan officer is the main person who could tell you if it is a right time to remove the loan contingency, because every loan underwriter has their guidelines and restrictions, they can not get over their guidelines and restrictions, ever element in a loan is a combination of a funding and closing, you could not miss one of their requirement, good luck.
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, ,
Mon Nov 29, 2010

A conditional approval means that there are outstanding conditions before the lender will fully commit to lend.

Lenders issue these commonly, and these are "incomplete" approvals.

It would be very wise to request a copy of the loan approval and to go over EXACTLY what the lender is requesting to see if you can meet these requested conditions.

Removing financing contingency in this lending market is not recommended until your loan is ready for loan documents and AFTER you have reviewed any remaining funding conditions to ensure you can meet these.

Depending on the type of financing you are obtaining, you would be best served to have the loan officer review these very carefully with you and to make sure this can done within the rate lock time frame.

Very best of luck to you.

Eric Nelson
Sr. Loan Officer
0 votes
, ,
Mon Nov 29, 2010

It only takes about 10 business days from loan submission for a good lender to get you a final approval, so wait until you have one and then remove contingencies.

Don Maher
Universal Capital Mortgage Corp
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Mark Pena, , San Jose, CA
Mon Nov 29, 2010
Hi Hollie,

In this market, I would recommend that you do not remove any contingency until you have received full approval. Put pressure on your agent and loan officer to make it happen. I have worked with clients who got denied at the last minute. Until the listing agent send your agent the notice to perform you are ok. You keep the loan contingency until you have received full approval, otherwise you are still liable for the purchase.
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Arn Cenedella, Agent, Greenville, SC
Mon Nov 29, 2010

It depends on what the conditions are?

Are the conditions just "crossing the Ts and dotting the Is"?

For example, if one of the conditions is to provide a copy of your W2 form for the past 2 years.
And you accurately entered your income on the loan application and the W2 will confirm the income you put on the application, then that is NOT something to worry about - this is just providing documentation - crossing the Ts and dotting the Is.
However if you were for some reason out of work for say 5 months in 2009, your W2 will not reflect the income you put on your application.
If this is the case, the lender will want some explanation of why you were out of work 5 months? Lost job? Maternity leave? etc.
In this case, I would not remove contingency until lender reviewed your explanation.

Hope this makes sense.

It also depends on who the lender and loan officer are?
Have you done business with this person before?
Do you trust this person?

Who is the lender? Is it Bank of America or Wells Fargo or XYZ Mortgage?

All of these factors need to be considered to answer your question.
0 votes
Caroline Choi, Agent, Los Angeles, CA
Mon Nov 29, 2010
Hi Hollie, things can certainly change up to funding, but all conditions remaining the same, you should be fine. I usually let the loan contingency run until the seller requests the buyer removes it, but that's because loans are taking longer these days. Also, the approval conditions can also take longer to fulfill and sometimes the buyer is unhappy with the conditions requested.

I would talk to your lender and agent to see if there's anything they forsee within your particular circumstance that could cause an issue. Best of luck!
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