People hoping to buy homes often secure pre-approval from mortgage lenders. The pre-approval process involves undergoing a soft credit check and validating household income.
A mortgage pre-approval letter can make an offer on a property more compelling to a seller. Pre-approval also helps buyers estimate their budgets more effectively. Those who have secured pre-approval may feel confident that they can follow through on any offer they make. However, including a financing contingency in offers and purchase agreements is still important for the protection of the hopeful buyer.
Financing can fall through without much warning
Even those with excellent credit scores and competitive jobs may struggle to secure a mortgage if their circumstances change. A layoff or demotion could affect a professional’s eligibility for a mortgage. The illness or death of a spouse who is a co-borrower could also affect mortgage eligibility. In some cases, even the use of credit while preparing to buy a home could lead to a previously pre-approved buyer becoming unable to secure a mortgage.
A financing contingency protects buyers in these and other scenarios where lenders do not honor pre-approval letters. If buyers cannot obtain a mortgage for any reason, a financing contingency helps protect their earnest money. Without a financing contingency, buyers could lose thousands of dollars in earnest money if they cannot obtain a mortgage despite having pre-approval initially.
Integrating the right terms into real estate offers can help buyers to better ensure that they can move on if a transaction falls apart. Financing contingencies are critical for buyer protection on the modern real estate market.