Archive for February 2013

The Financing Contingency

I am writing to you tonight with a rendition of “Skip to my Lou” playing in the background — children’s music is often the genre of choice here.

We have been spending some time looking for a home to purchase (our first). I enjoy the process since I get to learn a lot about something new to me (I was totally that way during the pregnancy, too).

The Seattle market is very competitive right now, at least in the neighborhoods we have been targeting. It’s not uncommon for homes to receive multiple offers (say three, four, five, or twelve) before bidding opens, and of course, the homes are being bid up. The house then sells immediately (discounting all of the time that passes before closing). Basically, if you want to get a nice home in these neighborhoods, you need to see the house before bidding opens, and if you like the house and want to know if anything is critically wrong with it before bidding, you need to do a pre-inspection. If your plan is to do a full inspection after your bid is accepted, don’t expect your bid to ever be accepted since all of the other bidders have waived the right to back out of the offer (without penalty) due to discovered maintenance or safety issues after being under contract.

This leads to the topic of this post: the financing contingency. Buyers are waiving this too. For the uninitiated: the financing contingency allows the buyer to get out of the contract without penalty if they are unable to secure financing (after an earnest attempt) or if the lender’s appraisal of the home comes in under the offer price. Not waiving this contingency can currently be the only reason for having an offer beat by a similar offer.

We may be in this situation right now (if you are the seller: we love your house!): we did not feel comfortable waiving the contingency because we worry about the implications of appraisal coming in low. This is not because we have any information to suggest that will happen, but because are being cautious. We are less worried about our financing falling through (although that can, of course, happen — even with pre-approval). For the latter, it falls into the “risk we are willing to take” bucket, but in a less competitive market we would feel better being more cautious.

It occurred to me that the financing contingency is really covering two distinct and different situations. In the case of a buyer confident in their financing, the concern is appraisal coming in low, but in the case of a seller the concern is the unknown buyer being unable to obtain financing. These are both very legitimate concerns, and it is unfortunate they are put together in one clause. If the contingency were split into two contingencies we could allay the fears of a seller by waiving the “obtaining financing” contingency while keeping the appraisal contingency, which is what we would have done with our recent offer.