With inventory at record lows, coupled with a huge influx of new residents and low-interest rates, the Seattle area is experiencing an extremely competitive market. Not only is the competition between new and old residents, but also investors. Since Seattle is still relatively affordable compared to cities like New York City and San Francisco, and growing immensely. Virtually on every front, someone wants a piece of the pie, thus making the situation tough for many buyers who are trying to get into the market (or sellers who want to move but cannot because they can’t find a home).
In many situations where we are seeing multiple offer situations, it is not uncommon to get 8+ offers on one listing, many offers are coming in as all cash offers. An all cash offer is a seller’s dream because there is no need for a lender to get involved, therefore, no third party to stop the transaction from happening. In such a competitive market, buyers can easily get caught up in waiving their rights/contingencies in the contract, making their offer more attractive to the seller. The less contingencies a buyer has in their offer, the fewer ways for the buyer to exit the contract. A common contingency that buyers waive is the financial contingency. It is extremely important to understand what that means and the potential repercussions of waiving.
To get a better understanding, let’s start with how the financial contingency protects a buyer. By including this contingency in your offer, you have stated that your purchasing of the house is contingent on getting a loan. Therefore, if you cannot get a loan, you can terminate the contract with no repercussions based on that fact. By including the financial contingency, as a buyer, you have protected your earnest money in the event you get denied for the loan by the lender. Earnest money is essentially your “good faith” deposit in the event your offer is accepted by the seller, typically 3-5% of the offer price. It is also the collateral for the seller in case you default based on what the contract states * (I will go more in detail on earnest money in a different post) *
An example of a situation where a lender will deny a loan is where the buyer loses their job mid-way through the transaction. Lenders will not provide a loan if someone does not have a job. So at any point in the contract period if you lose your job, a lender will cancel the loan. If that were to happen, you would alert the seller that the lender has decided to deny the loan and have the lender provide proof. Once that is done, the contract is terminated, each party goes their separate way, and the earnest money is returned to the buyer.
So, what does waiving your financial contingency mean? In the most basic terms, it means that the buyer will get the seller their money, period (assuming all other aspects of the transaction go smooth). For buyers, it means that they are so confident that the lender will approve them for the loan, that the seller automatically has rights to their earnest money if they cannot bring the money to the table. In essence the buyer is saying they are so confident that they will get approved for the loan, they are willing to “bet” their earnest money on it.
Let’s take the example from above but discuss what will happen if you had waived your financial contingency…So we are halfway through the contract period and everything is going well, but out of the blue you lose your job and no longer qualify for a loan. If you do not have the cash for the home, you have lost your earnest money to the sellers. This can easily be upwards of $6,000+. Now you have lost your job, the house, and are out six grand.
Please see my other post to see when it makes sense to waive the financing contingency!