Being a buyer today can really suck. With so few homes on the market, many homes get multiple offers, some over the asking price. To make matters worse, some of those properties are selling to all-cash buyers. As a buyer, you may have been disappointed more than once, losing to someone offering cash.
Let’s face it: if you are a seller and someone makes an offer to buy your house with no loan contingency, you are going to give that offer a serious look—even if it is not the highest offer. After all, it’s really, really hard to get a loan these days, isn’t it? And almost nobody can qualify, right? So let’s take the cash deal and be done with it. The appeal of an all-cash offer is the certainty that it will close. For some sellers, that certainty is even worth getting a little less for the property. With the goal of getting a deal accepted in multi-offer situations, some buyers opt to forgo the loan contingency. For those who are not familiar with the term, a loan contingency, which is written into the standard Residential Purchase Agreement, says, “Obtaining the loan(s)…is a contingency of this Agreement unless otherwise agreed in writing.” This means, “If I can’t get the loan, I get to back out of the deal and get my deposit back.” If you decide to make an offer with no loan contingency, it means that, if you are unable to get the loan and can’t close the deal, you will forfeit your earnest money deposit. If you have written a check for $5,000 to the title company, you could lose that money to the seller as “Liquidated Damages.” You may decide it is worth the risk to be able to make a more competitive offer and prevail over other would-be purchasers. If you do this, you can minimize the risk by getting a solid pre-approval from an underwriter before making your offer. Since you will be applying for a loan, you will need an appraisal. What happens if the appraisal comes in lower than the agreed price? If you are buying a home for $300,000 and plan to put $60,000 down (20%), you would get a $240,000 loan. If the property appraises for $290,000, you will have to make a larger down payment–$68,000—if you plan to have an 80% loan. Or you could keep your down payment and loan amounts the same. This would mean that your $240,000 loan would be more than 80% of the appraised value. In this case, you’d pay mortgage insurance of around $98.00 a month. The good news is that you can get mortgage insurance removed once your loan is 80% of your appraised value. Making a offer without contingencies is risky, yes. However, to prevail in today’s competitive home buying jungle, you may decide it is a risk you are willing to take.