Financing Contingency
TLDR: If the buyer is obtaining a loan, this contingency is the most critical (and time-consuming) hurdle of the transaction and is usually non-negotiable.
What should I know about financing contingencies?
Lenders have an extensive approval process that leaves the buyer with little negotiation room, which is why it makes sense for buyers to include this contingency in their offer if they're obtaining a loan. Most buyers will include a pre-approval letter with their offer, which does not necessarily mean there will be no hiccups related to the loan. Unless you're receiving a cash offer, it's likely that you'll need to cross your fingers and hope the buyer gets approval in order to get to closing.
The requirements and approvals required to obtain a mortgage are typically as follows:
Pre-qualification: the buyer enters their financials and a computer checks whether those are acceptable
Pre-approval: the lender has verified most of what the buyer has claimed
Approval: a credit check has been run and all financials have been verified
Appraisal: the property is valued at or above what the buyer has offered to pay
Title: there are no liens or clouds on the title that might lay claim to the property after the transfer of the deed
The Loan Itself: the underwriter reviews all of the borrower and property data to ensure the transaction is a good investment for the bank and makes the transfer
What are my options if the buyer is not approved for financing?
A buyer being rejected for a loan is a disappointment to both parties. The buyer may try to find financing elsewhere, but you'll likely want to re-list the property in the meantime to avoid wasting any additional time. If the buyer is not approved and they've included a financing contingency in their offer, they will get their EMD refunded to them.
Not all Loans are Created Equal
The type of loan the buyer is getting matters. Some loans are more strict than others, so if your property is in disrepair, buyers who only qualify for government backed loans such as FHA, USDA, or VA may be unable to purchase your property.
FHA, USDA, and VA loans, which accommodate buyers with lower credit scores and require smaller down payments, mandate that the property adhere to safety, security, and soundness standards. Investopedia provides an excellent summary of FHA minimum property standards here.
Should I accept a cash offer, even if it’s a lower offer than one with a financing contingency?
This depends on your situation. Lenders are often the biggest hurdle when it comes to transferring the property, so if you need to sell quickly, this may be a good option. Cash purchases can often occur in as little as ten days, while offers that require lender approval take about 35 days.
Another benefit to accepting cash offers are the limited repairs required prior to the sale, whereas sellers often end up conducting repairs requested by the seller or required by the lender for transactions that depend on the buyer obtaining a loan.