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Is The Mortgage Contingency Going to Last?

Waiving the Mortgage Contingency: Risk Vs. Reward

Waiving the Mortgage Contingency: Risk Vs. Reward

Orange County, CA – The housing markets are starved for inventory, and home buyers are scrounging together everything they can to get their bid just a little higher so they can win that home. But as they say, size isn’t everything. In some cases, it’s how you write the contract. Specifically, the market has swung far enough in seller’s favor that they’re starting to seek out offers that don’t have mortgage contingencies.

If you’re not familiar, a mortgage contingency is the part of a home purchase contract that says in essence, “I’m putting money down on this house, but if for some reason I can’t get the mortgage, I’m going to get my money back and be able to walk away free and clear.”

Unfortunately, the market around Orange County is getting to be so seller-centric that writing a mortgage contingency into your contract can actually kill your chances of getting a deal. It makes sense from a seller’s perspective: why would you let someone take your house off of the market by putting money down if you don’t know that they’re actually going to be able to buy it?

Marc Israel, a VP of Kensington Vanguard National Land Services, put it succinctly: “the last thing sellers want to do is tie themselves up with a buyer for some extended period of time just to have the buyer cancel the contract.”

This introduces a question for home-buyers: is it smarter to continue asking for the mortgage contingency in your contracts knowing that it will simply shut you out of the running for some homes? Or is it better to broaden your opportunities knowing that if your mortgage doesn’t come through in time, you may forfeit your down payment?

The answer is simple and absolute: you should never go ahead without a mortgage contingency unless:

  1. You know for an absolute fact that the building is warrantable. This means that there is no question you’ll be able to secure financing on the property.
  2. You have the ability to make a reasonable all-cash offer on the house in a pinch.

If those two factors are in place, and only then, you can consider going ahead without a mortgage contingency. Keeping in mind that ‘reasonable’, when it comes to all-cash, can often be as much as 20% below the list price. All-cash offers are common in this market. As much as 30% of offers are all-cash and those transactions tend to be much quicker and simpler than mortgage-based transactions.

Yes, this advice will shut you out from some sales — but it will also save you a wad of money on every deal that doesn’t work out. It’s important to remember that there are many reasons that a mortgage might be declined that have nothing to do with you and your financial situation. 

If the house in question is deemed unwarrantable, the mortgage can fail even if your credit is perfect.  A weak or overly strong appraisal from an appraiser can throw the entire transaction into a tailspin overnight. 

It’s always best to be safe with your money. That’s the bottom line. If you have a strong down payment and a good offer, the right home will come along. Be patient. Being over-anxious can lead to trouble. Consult us anytime!

Scott Storace

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