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Mortgage Loan Financing Contingencies: A Guide for California Borrowers

If you’ve been researching the home buying process in California, you’ve probably encountered the term “contingencies.” Many borrowers choose to include contingencies within their purchase contracts. These contract add-ons protect the home buyer from losing their earnest money in certain situations.

There are several different types of contract contingencies that can be included within a home purchase agreement. Today, we will focus on one type in particular. We will look at the mortgage loan / financing contingency and why certain California home buyers choose to include them.

Real Estate Contingencies Explained

The dictionary defines a contingency as “a future event or circumstance which is possible but cannot be predicted with certainty.” You’ll soon see how this definition applies to the home buying process, as well.

In a real estate context, a contingency is a certain event that must take place in order for the deal to go through. These contract clauses essentially protect home buyers, by giving them the right to cancel the contract if certain conditions aren’t met. Those future conditions are known as contingencies.

As mentioned earlier, there are many types of contingencies used by home buyers in California. A purchase agreement might be made contingent upon a satisfactory home inspection, a clear title search, or a property appraisal.

The Mortgage Financing Contingency

Home buyers in California can also make their purchase contracts contingent upon mortgage financing. This is commonly known as a home loan or financing contingency.

Home loan contingencies can vary from one contract to another because they can be written in different ways. For the purposes of this article, we will focus on the most common scenario.

So what do home loan contingencies do, exactly?

In a standard real estate transaction, a mortgage financing or home loan contingency gives the buyer a certain period of time to obtain mortgage financing. It gives them a chance to have their loan approved, prior to closing on the house. If the buyer is unable to secure financing by the deadline written into the contract, they can back out of the deal without losing their earnest money deposit.

This is the home loan contingency in its purest and most simple form. But again, it can become more complex depending on the details written into the purchase agreement.

To summarize: The home loan contingency gives the buyer a chance to obtain mortgage financing so that they can move forward with the deal. It also protects them from losing their earnest money deposit if they have to back out due to a lack of financing.

Should You Include One in Your Purchase Agreement

So now you know what a home loan contingency is and how it works. The next logical question is, when does it make sense to use one?

Should all home buyers in California include a home loan contingency within their purchase agreements? Or does it only makes sense in certain situations?

It’s important to know that financing contingencies are optional. As a home buyer in California, you are not legally required to use a home loan contingency. It’s entirely up to you. After all, the real estate contract is an agreement made between you and the seller. So it’s up to you to create terms and conditions you are comfortable with.

Some California home buyers use home loan contingencies while others do not. It can vary from one transaction to the next. In many cases, it comes down to local real estate market conditions and trends.

In a fast-moving real estate market with a lot of competition among buyers, a mortgage financing contingency might actually work against the buyer. It might give the seller a reason to push their offer aside in favor of a “cleaner” offer without such contingencies.

The same is true for other types of real estate contingencies, such as the home inspection and appraisal. The more “contingent” an offer becomes, the more likely a seller is to reject it. You’re essentially making the deal more complicated for the seller.

This might not be a big deal in a slow real estate market. But in a hot seller’s market, mortgage financing and other types of contingencies could work against you. Especially if the seller has several other offers to choose from.

Understand Your Real Estate Market

Our advice is to work with a knowledgeable real estate agent who understands current market conditions in your area. He or she will be able to tell you whether a certain type of contingency is a good idea or not, based on their previous experiences.

For instance, a real estate agent in a hot market might advise their clients to consider waiving or skipping certain contingencies, in order to make their offers more appealing to the seller.

Ultimately, however, it’s your decision to make. This is your real estate transaction, and potentially your new home. You should never submit an offer you’re not comfortable with. If you feel like you need to include home loan contingencies within your purchase agreement, then by all means do so. Just understand how it might affect you.

Need mortgage financing in California? Bridgepoint Funding offers a broad range of mortgage options for home buyers in California. We are based in the Bay Area but serve the entire state. If you’re in the market for a home loan and have financing-related questions, please contact our staff for help.

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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