Step #9 — Loan Contingency
The easy step-by-step tutorial designed to make home-buyers knowledgeable and confident.
Inspections? Check. Appraisal? Check. As escrow is winding down, we have one more contingency to be released before closing this deal and getting the keys to your new property!
To recap, this is week nine of my ten step tutorial about how to purchase a property. Whether it is your first time, or fifth time, buying a home can feel complicated and overwhelming — but it doesn’t have to be. As an expert of all things home, I’m here to make it simple so that anyone can feel knowledgeable and confident when playing the real estate game.
For the last several weeks I’ve been going over what happens when your offer has been accepted, and your transaction goes into escrow. If you have an all cash offer, there will not be a loan contingency. However, many of us do need a loan to purchase a property, so I’m here to break that down!
The Loan Contingency
The loan contingency is often the last contingency to be released. This is important to keep in mind because it signifies your deposit going hard. Before the inspection contingency, appraisal contingency, and loan contingency are released a buyer can pull out of the transaction of a house and expect to receive their deposit back in full. These contingency’s are in place to protect the buyer in case they discover information about the property that makes them no longer desire to move forward with the purchase. A deposit ‘goes hard’, or is no longer automatically eligible to be returned, once all three contingency’s are released.
The loan contingency is usually the last to be released because the entity lending money will need an appraisal report in order to confirm the loan.
Once the appraisal comes in, your mortgage broker or lender will complete the underwriting. When it comes to a real estate transaction, underwriting is the process of determining how much financial risk (i.e. how large of a loan) the lender, or bank, is willing to provide the individual or entity purchasing a property. Using the appraisal, which determines the value of a property, an underwriter will scrutinize the loan request to ensure that the money they are lending matches the market value of the home.
During this process your bank or lender will let you know of any obstacles that are holding you back from loan approval. They will also reach out if there are important items that need to be addressed. Once all the items are resolved, the broker or lender gives you ‘Loan Approval’ or ‘Clear to Close’. I’ve included a video below that dives deeper into this topic, if you are more of a visual learner.
Once you have this ‘clear to close’ status with your lender, you can release your loan contingency. Your agent will have you sign your final ‘Contingency Removal’ form stating the release of ALL contingencies. After you sign and removal ALL your contingencies, your deposit goes hard and will be irrevocable.
Now, you are almost at the finish line. Congrats! However, after releasing all contingencies, a buyer will still have a list of items to complete before closing. Next week is the final chapter of my step-by-step guide on how to buy home. I’ll be crossing all the t’s and dotting all the i’s, so be sure to check back in next week to find out everything you need to know about closing.
Until then, give yourself a pat on the back for taking the time to educate yourself! Along with providing this information every week, I’ve also designed this tutorial to be interactive. To help each home-buyer get the most out of this series, I’m making myself available to answer any questions you may have. Don’t be shy! This tutorial is about empowering YOU, the buyer, as you set out on your mission to purchase a property.
For the fastest response you can comment on my Step #9 Video or reach out on social media here.
You can also find additional tips, and insights on my Instagram, where I share all the most recent updates on anything and everything real estate.
Looking forward to seeing you again next week!
-Lauren “Glasses” Biedenharn