We are looking to purchase a house in the greater D.C./Maryland metro area. Most houses in our price range are selling quickly, with multiple offers. Our agent has advised us to waive the home inspection contingency, conduct a “non-contingent” home inspection, and if any issues are found, we can have our lender (who has already written a letter approving us for the purchase price) deny us a loan.
Double-checking with our mortgage lender, she stated that many people had asked her about this but that it was incorrect. The mortgage companies will only deny financing for financial reasons, not at the whim of the customer.
Who’s telling us the truth, or are each only giving us part of the story?
The purpose of the financing contingency in a contract is to give you the ability to walk from a real estate purchase if your lender denies your loan due to a financial or credit reason.
You shouldn’t rely on a backhanded mechanism to get you out of the deal. Furthermore, why would a seller allow you to conduct a “non-contingent” inspection of the home? From the seller’s perspective, either you like the home or you don’t. You can always conduct that inspection once you’ve closed on the home.
This agent’s suggestion puts the lender in a bind. If the lender doesn’t have a real reason to deny you the loan, the lender shouldn’t deny it. It isn’t honest and it forces them to act in a way that could carry sanctions (from a regulator) or put them in the middle of a legal battle between their borrower and the seller of a property.
Your agent is giving you bad advice. The mortgage lender is giving you better advice. Legitimate mortgage companies should only deny financing for real financial reasons (i.e. you lost your job and can no longer qualify for the loan), not at the whim of every remorseful buyer.
But at least you double-checked before following poor advice.
What can you do if homes are selling like hotcakes and you want some legal way to back out of a deal? Consider adding an appraisal contingency rather than a financing one. An appraisal contingency will allow you to back out of the deal provided the home doesn’t appraise at a price high enough to meet your mortgage requirements. If you put 20 percent down and the property doesn’t appraise out in value, you’d have to put down more cash to make the numbers work. But that’s your out. In that situation, the property isn’t appraised at the number you need for your loan, so you can back out of the deal.
However, an appraisal contingency doesn’t replace the importance of having a good inspection done.
If homes are so hot that you have to come in with a completely “clean” offer, entirely devoid of contingencies, then you need to re-evaluate what sort of risk you’re willing to take in order to make the deal work. Not having any contingencies could leave you exposed to a multitude of expenses.
What if you find out during the “non-contingent” inspection that the house has a structural flaw that will cost $50,000 to fix? Or, you discover that there’s lead in the water and all the piping needs to be replaced for $25,000? Or, there’s an ongoing leak issue and the house is covered in black mold and has to be completely rebuilt to the tune of $125,000 (none of which is covered by insurance)?
While seller disclosure laws give you some limited protection, if the seller is not aware of a problem, then the seller isn’t able to disclose it to you.
Recently we read about a court case in which the sellers knew of a problem with their windows and didn’t disclose it. As they fought the case through the courts, the court read the state’s seller disclosure law narrowly and said that the sellers didn’t have to disclose the issue to the buyers since the state’s seller disclosure form had a place to disclose issues pertaining to walls but not windows. For now, those buyers are out of luck, and their window problem will cost them thousands of dollars to repair.
Do you still want the property? Are you willing to pay any price at all?
When buyers walk into these sorts of situations, we believe it’s just a time bomb ticking away. You’re buying a home to live in for the next 10 to 20 years. You don’t want it to subsume you and suck all the savings that you have.
The smartest move you can make is to evaluate what the risks are and how much buying this house could cost you if everything that could go wrong did. Then, be honest with yourself. Do you really want to buy this house at this price point? And do you still want to work with this real estate agent?
Finally, talk to a smart real estate attorney about how you can protect yourself going forward.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.