loan contigency

Asked by Anh Nguyenh, San Jose, CA Fri Dec 14, 2012

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The Medford…, Agent, Fremont, CA
Sat Dec 15, 2012
This is a tricky question due to the way lenders have changed the loan underwriting process the past few years.

When you submit an offer, you have three contingencies that are designed to protect you in case something goes wrong. In the case of your loan contingency, it’s designed to keep you from losing your deposit should something happen to your loan.

It defaults to 17 days in the normal purchase agreement and was designed to provide plenty of time for a lender to fully approve the loan prior to the need to remove the contingency. Frequently, to sweeten an offer, we see buyers willing to shorten this to 10 – 14 days.

Until just a few years ago, lenders had no problem informing you it was OK to remove your loan contingency because they could have it through underwriting and have it fully approved in a short period of time. That has all changed – now your loan is scrubbed three times at least AND final approval frequently does not come until the loan actually funds. This is frequently 25-30 days into the transaction and many days after the loan contingency was supposed to have been removed.

Many buyers, unsure about the status of their loan, try to hang onto their loan contingency until very late in the transaction – even up until the time the loan funds. This practice infuriates sellers who want the contingencies removed on time – typically between 10-17 days into the transaction. It’s also a breach of the contract and can have serious implications. Many buyers try to submit Loan Contingency Extension requests, however, in a lot of cases, sellers do not want to cooperate.

It puts buyers in a very difficult situation:

(1) If they remove the loan contingency on time (frequently before final approval has been given by the lender) then, if something goes wrong, they will lose the transaction AND their deposit.

(2) If they DON’T remove their contingency on time, then the frustrated seller could give them a notice to perform and, if the buyer refuses to provide the contingency removal, the seller can cancel the transaction and put the property back on the market. In the current market with multiple offers, values increasing on a daily basis AND back-up offers frequently in place, this is a VERY real possibility.

This is currently compounded by the extremely large number of requests for refinances hitting every lender and backlogging the banking systems. Lenders are currently so busy that delays are more the norm than the exception.

It’s a tough new world and it puts buyers at odds with sellers more often than not. It’s causing very real frustration on every level and has caused more than one buyer to take the chance of not removing their loan contingency until the very end.

It’s a very risky practice, but we see it every day.
3 votes
charles butt…, Agent, san jose, CA
Sat Dec 15, 2012
Thank you for your question Anh Nguyen:

You have received some very good responses. Allyson Alessandrini makes an excellent point that in the current market with multiple offers and overbids, the house may not appraise for the amount of the purchase price. You may regret removing your loan contingency in those circumstances.

Tine Lam makes an excellent point that in a multiple offer situation if you are going to be competitive with the other offers, especially the all cash offers, you may have to go in with no loan contingency. Personally I am reluctant to do that. However I recently lost a multiple offer situation where the seller chose to accept an offer with no loan contingency, no appraisal contingency and no inspection contingencies.

Ron Thomas makes an excellent point that it is often safest to keep the loan contingency until the escrow closes. In a buyer's market you can do that, and still find a seller who will accept your offer. In Fresno, where Ron Thomas practices Real Estate, it still appears to be a buyers market where you can find sellers who are willing to accept a loan contingency that runs to the close of escrow.

In San Jose, it is a sellers market, and it is rare that you will find a seller who is willing to accept a loan contingency that runs to the close of escrow.

Essentially in San Jose and our seller's market, it comes down to the question: how much do you want the house and how much risk is it safe for you to accept.

Thank you,
Charles Butterfield MBA
Real Estate Broker/REALTOR
American Realty
Cell Phone: (408)509-6218
Fax: (408)269-3597
Email Address:
1 vote
John Juarez, Agent, Fremont, CA
Sat Dec 15, 2012

You have received good information about “loan contingency” which may or may not answer your question. I say “may” because you did not state a question. What is it that you want to know?
1 vote
Ron Thomas, Agent, Fresno, CA
Sat Dec 15, 2012
When you slap a LOAN CONTINGENCY on your OFFER, you are saying that if your LOAN does not come through for you, that you may/can walk away from the deal, with your DEPOSIT.

We used to use a standard 17 day Loan Contingency; this isn't standard any more; it takes too long to get it set in stone, and fails too easily. Lately, a lot of us are using either 30 days, or "end of Escrow".

Talk to your Buyer's Agent; that's what he is there for.
1 vote
Norman Aless…, Agent, San Jose, CA
Sat Dec 15, 2012
I agree with Tina , but up to a point, if you are making an offer on a home with multiple offers you are probably going over askings and sometimes by a lot make sure the comps justify this other wise the home will not appraise and you will be stuck unless you have the cash to make up the difference. Some times this is worth it some times it is NOT.
Work with a good buyers agent who can advise you accordingly. Feel free to contact me with any questions.
At your service,
Certified Distressed Property Expert
1 vote
Tina Lam, Agent, San Jose, CA
Sat Dec 15, 2012
You should remove the loan contingency when the buyer is ready. If you're the buyer, then ideally, you would wait until you have final loan approval from your lender. But, if you're in a competitive bidding situation against cash offers, you should remove the loan contingency at the time you make the offer to have a fighting chance.
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