Do I Need a Mortgage Contingency In My Offer? Factors to Consider

In today’s competitive real estate market, many buyers are being encouraged to make offers without any contingency for mortgage approval.  Before taking this step, it is important to understand how this contingency works in Connecticut. If you are unfamiliar with how a mortgage contingency works in Fairfield County, Connecticut vs. elsewhere, read this post. 

So, let’s jump in, what factors should you consider before waiving your mortgage contingency?

Initially I would determine the lowest amount you need to borrow in order to close. This “bottom line” loan amount is important in a couple of ways. 

First, it allows you to discuss with your lender your likelihood of qualifying for that amount and, if you qualify for a higher loan amount,  you have confidence that even if everything is not perfect with your application, you can move forward with what you need. 

The second reason is to determine whether the appraisal will have an impact on your ability to close. As part of every loan application, the bank will obtain an appraisal to give them a value of the property. The results of the appraisal can affect your loan amount.  

Typically, regardless of your ability to repay, banks will only lend up to a maximum of (i) 80% of the purchase price or (ii) 80% of the appraised value, whichever is lower. So the question becomes, if the property were to appraise for less than your offer by a significant amount, would you still be able to obtain the financing you need? 

Once you have determined you can obtain your “bottom line” loan amount, there are some  additional things to consider.  These are: 

1. What is your personal risk tolerance? Are you willing to live with the consequences in the event something unforeseen occurs. Typically, if you cannot close once all contingencies are met, your contract deposit (usually 10% of the purchase price) would be forfeited to the Seller. 

2. Do you need to drop the contingency in order for your offer to be accepted? Your realtor can advise whether market conditions make it unlikely your offer will be accepted with a contingency. Often there is some tradeoff between contingencies and price (the higher the price the more Seller tolerance for a contingency). 

3. Your access to cash. If you can access the funds to close without any financing at all (for instance through a gift or family loan), you can more easily waive your contingency.

4. The willingness of the bank to issue a pre-approval, where the lender has done a preliminary review of your credit and calculated debt-to-income ratios.

Ultimately, the decision to waive the mortgage contingency should be made only after careful consideration and with an objective view of your financial situation and the value of the property. Should you have any questions or wish to discuss your personal situation, please do not hesitate to contact me. Also, please share this if you think it may be of interest to someone else!