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, itâ€™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 â€“ 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 â€“ 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 â€“ even up until the time the loan funds. This practice infuriates sellers who want the contingencies removed on time â€“ typically between 10-17 days into the transaction. Itâ€™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 DONâ€™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.
Itâ€™s a tough new world and it puts buyers at odds with sellers more often than not. Itâ€™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.
Itâ€™s a very risky practice, but we see it every day.