You’re pre-approved for a loan. But is your future home?

by Robert J. Smith on June 28, 2013

So, you are going to buy a home, either a house, a coop or a condo. You speak with a lender or a mortgage broker who tells you that you are “pre-approved” or “pre-qualified” for a loan up to $1,000,000. Sounds great, but this can provide you with a false sense of security, so that you may decide that you don’t need a financing contingency. However, the approval of your personal finances is only Step 1 in the process of obtaining a loan.

What happens if the property appraises poorly, or the building has financial issues that lead the lender to decide not to give you the loan you want? Step 2 is the lender analyzing the building’s physical condition, finances, insurance coverage, owner/occupancy percentage or any number of other ever-changing requirements that have nothing whatsoever to do with your personal finances. If you decided to forgo the contingency, and the bank refuses to give you a loan based on Step 2, you will either have to pay cash for the property or risk losing your deposit, which is typically 10%.  This is the case, even if you are the strongest and most qualified applicant (I often tell clients that “Bill Gates wouldn’t get a loan from this lender in this building”.)

What’s a buyer to do? In the first instance, speak with your attorney and/or your broker about requesting that a financing contingency be a part of your contract to purchase the property.  A Seller may refuse to provide a contingency. In that case, a buyer has two options. The first is to move forward with the financing, with a full understanding that if the lender refuses to give the loan, you either have to pay cash for the property or forfeit your deposit. The second option is to walk away. In some negotiations, this could make the Seller reconsider giving you the contingency. If the Seller holds firm, you can move on knowing that you avoided the risk, and can seek another property on more favorable terms.

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