What Does Removing the Loan Contingency Mean for Homebuyers?
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Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
If you’ve been shopping for a home, you’ve likely come across the term “loan contingency,” and you may be considering including this clause in your purchase offer. Or perhaps you’ve already made a loan-contingent offer, and you’re wondering about contingency removal.
But what does removing this contingency mean for you? It’s a step that could make your offer more attractive to sellers, but it’s not without ramifications and risks, and in some states, there are laws that dictate the process of removing a contingency.
Whether you’re just starting to explore the housing market or are in the midst of deciding whether to remove a loan contingency from an existing offer, this guide is tailored for you. We’ll also share how, as an existing homeowner, you can make a stronger non-contingent offer to get the home you want.
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What is a contingency when buying a home?
A contingency in a real estate contract is a condition or an action that must be met for the contract to become legally binding. Think of it as a safety net for you, the buyer.
Contingencies provide a way to back out of the real estate transaction without penalty under certain circumstances. They are essentially clauses in your purchase agreement that are designed to protect you from unforeseen issues, like problems unearthed during a home inspection or difficulties securing financing.
For instance, a common contingency might be a home inspection contingency, which allows you to renegotiate or even withdraw your offer if significant issues are discovered during the inspection.
What is a loan contingency?
Similarly, a financing contingency, often referred to as a mortgage or loan contingency, ensures that if you can’t secure a mortgage, you can opt out of the purchase without facing legal or financial repercussions, such as forfeiting your earnest money deposit.
In other words, it’s your safeguard, ensuring that if your home loan falls through, or is not approved within a specified period, you can withdraw from the deal.
This clause, which typically carries a contingent period of 30-60 days, sets some clear guardrails. It specifies the type of loan you intend to secure, the time frame for obtaining approval, and the maximum interest rate you’re willing to accept.
By including a loan contingency, you’re essentially saying, “I’ll buy this home, provided I can get the necessary financing under terms I can manage.” It’s a buyer’s tool for balancing the commitment to purchase with the practicalities of securing a mortgage.
How does a contingency removal work?
Contingency removal in real estate transactions varies depending on state laws. In some states, such as California, removing a contingency from a home purchase agreement is a formal process that requires filling out and submitting a specific document. This act of documentation ensures that both parties are clearly aware and in agreement that the contingency has been removed. (More on this below.)
Other states like Texas and Florida operate differently. Here, if a buyer doesn’t meet a specified deadline, it may automatically result in the removal of the contingency.
Regardless of the state-specific processes, removing a contingency carries inherent risks. For example, if you decide to remove a mortgage contingency and neither you nor the seller formally cancels the agreement, you may still be legally obligated to complete the purchase. Failure to do so could mean losing your deposit, a significant financial setback. In other cases, you may face legal action from the seller that goes beyond the loss of your earnest money.
As a buyer, it’s important to be aware of state laws and adhere to all deadlines in your purchase agreement. A top real estate agent can ensure that you are handling contingency removal properly and meeting all required deadlines.
Contingency removal in California
California law requires what’s often referred to as “active removal” of a contingency or contingencies. The buyer must make a formal request in writing by signing and submitting a Contingency Removal form. Without this form, any contingencies included in the purchase agreement remain in effect, even if the standard 17-day contingency period (or date listed in the contract) has passed.
If you’re buying a home in California, the California Association of Realtors (CAR) has produced a handy guide called “Contingencies and Contingency Removal.“
When might a buyer remove a loan contingency?
Removing a loan contingency is a significant decision in the homebuying process. Here are some scenarios where a buyer might consider this step:
- Loan approval received: If you’ve received final approval for your mortgage earlier than expected, you might choose to remove the loan contingency. This signals to the seller that your financing is secure.
- Competitive market conditions: In a seller’s market, where multiple offers are common, removing a loan contingency can make your offer more attractive compared to others that still carry this condition.
- Strong financial standing: If you’re confident in your financial situation and creditworthiness, you might remove the contingency to expedite the process, especially if you have a high likelihood of loan approval.
- Backup financing options: Having alternative financing options, like a pre-approved loan from another lender or access to personal funds, can give you the confidence to remove the contingency.
- Shortened loan contingency period: In some cases, if the loan contingency period is nearing its end and you have a positive outlook on your loan approval, removing the contingency can be a strategic move to keep the transaction moving forward.
- Seller’s request: Sometimes, a seller might request the removal of the loan contingency to move the sale process along, especially if they have other interested buyers.
Each of these scenarios carries its own possible pitfalls and benefits, and it’s important to weigh them carefully. Consulting with a real estate professional or a financial advisor is always a wise step to ensure you’re making a well-informed decision.
Contingency removal vs waived contingency
Contingency removal occurs when you, as the buyer, initially include a contingency in your offer but then remove it before closing, often after certain conditions are met or reassessed. For instance, a loan contingency might be removed after securing mortgage approval.
On the other hand, a waived contingency means you choose not to include a specific contingency from the start, demonstrating a higher level of certainty or risk tolerance.
Waiving a contingency can make your offer more appealing in a competitive market, but it also increases your risk, as you lose the protection that the contingency would have provided.
Both strategies have their place in real estate negotiations, and the choice largely depends on your confidence in meeting the contract’s requirements and your willingness to accept associated risks.
Other common real estate contingencies
When buying a house, apart from the loan or mortgage contingency, several other common real estate contingencies are often included in purchase agreements. These include:
- Home inspection contingency: This clause allows you to have the home professionally inspected. If significant issues are found, you can renegotiate or back out of the deal.
- Appraisal contingency: An appraisal contingency ensures the property is valued at a minimum, specified amount. If the appraisal is lower, it gives you the option to renegotiate or withdraw without penalty.
- Title contingency: This contingency allows the buyer to research the property title and ensure it’s clear of issues like liens or disputes, which could affect the buyer’s intended use of the property or ownership rights.
- Sale of current home contingency: This clause, also called a home sale contingency, applies if you need to sell your current home before finalizing the purchase of the new one. It allows you to back out if you can’t sell your existing property.
- Insurance contingency: This clause ensures you can apply for and obtain adequate home insurance, which is often a requirement for obtaining a mortgage. In some states, securing homeowners insurance can be a challenge.
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How can I make a non-contingent offer?
Making a non-contingent offer, where you forego certain conditions like a loan or inspection contingency, can be a strategic move, especially in a competitive market. Here are some ways to make such an offer more feasible:
- Secure pre-approval for a mortgage: Having a mortgage pre-approval in hand demonstrates your financial readiness and reduces the need for a loan contingency.
- Conduct pre-offer Inspections: Doing your due diligence before making an offer, like a pre-offer home inspection, can provide enough confidence to skip the inspection contingency.
- Familiarize yourself with the property: Learn as much as possible about the property beforehand to feel comfortable waiving certain contingencies.
- Have a financial buffer: Plan ahead to have enough funds to cover any unexpected costs that might arise without the protection of contingencies.
- Consult with top real estate professionals: Seek advice from real estate experts who can provide insights tailored to your specific situation and the local market.
- Use a “buy before you sell program”: Programs like HomeLight’s Buy Before You Sell can offer the financial flexibility to make a non-contingent offer. This type of program allows you to unlock the equity in your current home to buy your next home, making your offer more attractive to sellers.
Here’s how HomeLight Buy Before You Sell works:
»Contact HomeLight or ask your agent how HomeLight Buy Before You Sell can provide a smoother, contingency-free home purchase experience.
Navigating loan contingency removal: key takeaways
Understanding and navigating the removal of a loan contingency is an important step in your homebuying journey. It’s a decision that can make your offer more appealing to sellers but also comes with its own set of risks. Key takeaways include:
- Know the process: Familiarize yourself with how contingency removal works, particularly in your state, as procedures can vary.
- Assess your financial security: Ensure you’re confident in your financial situation and mortgage prospects before considering removing a loan contingency.
- Understand the risks: Be aware of the implications, especially the risk of losing your earnest money deposit if you fail to secure financing after removing the contingency.
- Consult professionals: Always seek advice from real estate experts and financial advisors to make an informed decision.
- Consider alternatives: Explore options like HomeLight’s Buy Before You Sell program, which can offer more flexibility in making non-contingent offers.
Each real estate transaction is unique, and what works for one buyer and property may not be suitable for another.
At HomeLight, we partner with the largest network of top agents in the country who have the experience to safely guide you through the entire buying and selling process — from contingencies to closing.
