By Dian Hymer
Most buyers take out a mortgage when they buy a home. So, most purchase contracts include a financing contingency that lets the buyers out of the contract if they are unable to get a mortgage.
The financing contingency should include the terms of the mortgage you'll be applying for: the interest rate, the type of loan--fixed or adjustable, and the points (the loan origination fee). Then if you make a good faith effort to get a loan on the specified terms, but you're turned down, you usually have a legitimate way out of the contract.
The financing contingency should also include a time period for the loan to be approved. A customary time frame for loan approval is 30 days from acceptance of the purchase contract. However, with computerized loan origination, some mortgages can be approved more quickly.
Some financing contingency clauses don't specify a time frame for loan approval. However, a financing contingency that runs for a set number of days following acceptance is preferable. When the time period is up and the buyers remove the contingency, the sellers know the buyers have their financing.
First Time Tip: Get a written copy of your loan approval directly from the lender before you remove your financing contingency. This approval should state the loan amount you are approved for along with the interest rate and the date by which the transaction must close in order for the interest rate to stay in effect.
Often, loan approval is conditional. This means that the loan is approved as long as certain conditions are met. Some of these conditions relate to documenting the lender's file. For example, purchase contracts are often signed using fax machines; sometimes the copies are illegible. In this case, the lender may request better copies for the loan file. Since all parties have agreed to the contract, fulfilling this requirement shouldn't be a problem.
Other conditions may seem innocuous, but could be harder to satisfy that you might think. For example, a buyer recently received loan approval with only one condition: to provide the lender with verification of the source of funds needed to close.
The buyer had the money, but he was a private person who kept his money in various different bank accounts. Some of the money was in accounts that were in the names of his relatives. The lender disapproved this buyer's source of funds verification because the money wasn't held entirely in his own name. Transferring money into his own accounts wasn't an option because the lender required that the buyer's down payment be "seasoned" money.
Lenders frequently want down payment funds to have been in the buyer's possession for at least three months. This is called "seasoned" money. If seasoned money is a requirement, the lender will want written confirmation from the appropriate financial institutions that you have had the money in your accounts the required time.
The mortgage broker above should have reviewed the buyer's source of funds with him before his loan package was submitted to the lender for approval. A good broker can anticipate a lender's objection and deal with the problem in advance. In this case, the lender would only approve the loan if the buyer increased his down payment from 20 to 30 percent of the purchase price.
The Closing: This buyer had the extra money and was willing to increase his down payment. But, if he'd removed his financing contingency based on the conditional approval and hadn't been unable to fulfill the lender's requirements, he could have lost his deposit.
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