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Should you waive the financing contingency?

(Jonathan Ernst/REUTERS)

Marshall Park is a D.C.-based real estate agent at Redfin. 

The financing contingency is a clause in the real estate contract indicating that the homebuyers’ purchase offer is dependent on them securing financing for the home’s agreed-upon purchase price.

The contingency will specify a mutually agreed upon amount of time during which the buyer will apply for financing and the loan will be underwritten. In a competitive market, buyers may choose to waive some contingencies, including the financing contingency, to make an offer more appealing to the seller.

But waiving contingencies can present more risk than a buyer cares to take on. If you waive the financing contingency and your lender doesn’t approve your loan for the price of the home, you have to make up the difference in cash or walk away and lose your earnest money deposit or more if the sellers decide to sue. It’s important to talk with your agent and lender about whether this strategy makes sense for you.

As a buyer, here are the things you should consider:

 Know the rules associated with your loan type. The exact terms of your offer contract and the financing contingency in particular vary depending on your type of financing (conventional, FHA or VA) and the rules and regulations of the local real estate association that governs where you are purchasing.

D.C., Virginia and most of Maryland have similar contract terms in general, but subtle differences can mean a lot. Carefully review the contract with your agent and lender so you can make an informed decision and know the potential risks and rewards. If you have questions, ask. Your agent and lender are experts and can help explain the details and what you can expect.

• Maintain communication with the listing agent. To ensure a smooth financing contingency period, it’s vital for your agent and the listing agent to be in frequent contact with each other throughout the financing process.

Delays and other unforeseen issues can happen, but when agents are in constant communication, the problems are more readily solved. Your agent should communicate when the commitment letter from your lender will be ready and if there are any unanticipated delays in the process.

• Work with a direct local lender. I typically advise my clients to work with a direct local lender. In my experience, local lenders are knowledgeable about the neighborhood you’re purchasing in, responsive and much more reliable. Most direct local lenders work outside regular business hours and will give you their cellphone number in case anything comes up.

Their underwriters are usually in house, which allows for even quicker turnaround and response times. I suggest talking to at least three local lenders at the beginning of your home search to compare rates and programs. It’s important that you trust your lender, so ask friends, family, co-workers and your agent for recommendations and read lender reviews on sites like Angie’s List and Redfin Open Book.

• Imagine the worst-case scenario. In April, more than 60 percent of homes for sale in the D.C. metro area had multiple bids, with some of the most desirable properties receiving upward of 20 offers. Given the stiff competition, buyers are trying to find ways to make their offer more competitive. One way to make an offer more attractive to sellers is by removing contingencies that allow the buyer to walk away from the deal. This can show that the buyer is serious about the property and removes risk for the seller that the deal will fall through.

Does your offer look stronger if you waive the financing contingency? Yes. Is it very risky to waive the financing contingency? Yes. If you decide to waive the contingency and you cannot purchase the house because of unforeseen circumstances, you could lose your earnest money deposit or possibly be sued. Think of every worst-case scenario, such as losing your job, before removing any contingencies. This is not meant to be all doom and gloom, but advice to proceed with caution.

• Think about other options. If you and your lender decide not to waive the financing contingency, there are other ways that you can show that your finances are in order. Have your lender call the listing agent and vouch for your finances and mortgage approval.

The listing agent is helping his or her clients select an offer that will have the fewest delays and issues on the way to closing, so hearing straight from your lender can put them at ease. You can also have your mortgage fully approved before you submit your offer, so the sellers know you’re serious and you have the financial resources to purchase the home.

This allows you to shorten the financing contingency time period or even waive the financing contingency with more certainty. Even if you still don’t waive the financing contingency, you’ve shown that you’re serious buyers.

Lastly, talk to your agent about other ways to strengthen your offer. Be strategic about your offer price, consider including a personalized cover letter and be as flexible as possible on closing dates.

Previously from Marshall Park:

Homebuyers have options with inspection contingency

D.C. neighborhoods where homes sell fast

Tips on winning a bidding war in D.C.