San Francisco Chronicle - (Sunday)
Buying with no safety net: The pros and cons
“I explained to the borrowers that there are risks when going in without a loan or appraisal contingency. For example, if the borrower lost their job during the course of the loan process, then, they would no longer qualify for the loan but would still lose their earnest money deposit.”
Mortgage broker: Liz Bayer, ProMortgage.
Property type: Singlefamily home in Fairfax.
Appraised value: $1.15 million.
Loan amount: $650,000.
Loan type: 30year fixed.
Backstory: It is common knowledge that there is a huge shortage of inventory which drives “bidding wars” galore. I had a couple who wanted me to help them obtain mortgage financing to purchase their new home.
Their Realtor highly recommended that my clients go into their offer with no loan nor appraisal contingency so that their offer would be competitive in this aggressive market. I explained to the borrowers that there are risks when going in without a loan or appraisal contingency.
For example, if the borrower lost their job during the course of the loan process, then, they would no longer qualify for the loan but would still lose their earnest money deposit. Since my borrower had been employed with the same company for more than 10 years, this seemed to be a low risk that he would lose his job during the transaction.
Another example would be that the appraisal value might come in lower than the purchase price, which could negatively impact the rate pricing. In this case, since my clients were putting 43% down on the property, the loantovalue was already extremely low, so if the appraisal came in short of the contractual purchase price, this would likely not trigger any additional outofpocket expense.
If the appraised value came in low, the impact to the rate pricing would be a little worse, but my clients had enough income to support any rate fluctuation.
Ultimately, the decision to make an offer with no contingencies rests solely with the buyers, since there are variables that are not in the lender’s control.
To strengthen the confidence level that making an offer without a safety net was a calculated, informed risk, we also had the file preunderwritten, which is stronger than the traditional preapproval.
As a result of doing our homework, my clients made their offer with only an inspection contingency and with no loan nor appraisal contingency and successfully got into contract.