Mortgage Contingency vs. Commitment

A loan approval has to go through several stages.
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Contingency and commitment are terms that relate to the approval of a purchase loan through a lender. Mortgage contingency is a clause written into a sales contract making the contract void if no mortgage can be obtained. A commitment is an official approval from the lender that satisfies the mortgage contingency. A mortgage contingency clause in a sales contract will specify the date at which the seller expects the buyer to have a commitment in place. This date will typically be a week or two prior to the anticipated closing date.

Different Kinds of Approvals

There are different stages in the process of getting an approval for a mortgage. The first one is a pre-approval, which is provided to the seller at the time the offer is made. Pre-approvals are often based only on verbal conversations between the borrower and the lender. Usually the lender has at least pulled a credit report and is comfortable that the loan can be approved.

If there are going to be multiple offers on the house, it can strengthen an offer if the buyer gets a full approval -- effectively a loan commitment -- right away. This can be accomplished by submitting income and asset documentation to the lender, who will underwrite the complete loan file.

Commitment After Conditions Are Fulfilled

Even if a full approval is obtained at the beginning of the loan process, this does not constitute an actual mortgage commitment. An appraisal still needs to be done on the property, and the underwriter will need to review it to make sure it satisfies the bank’s expectations. Additionally, the underwriter might ask for further conditions to be met regarding income, asset or credit documentation. Once all conditions have been submitted and cleared by the underwriter, the mortgage commitment is issued. If the underwriter asks for a lot of conditions, or if the buyer is not prompt in supplying them, it can create problems with the timing of the sale’s closing. Sometimes the mortgage commitment is issued just a day or two prior to closing.

Waiving the Mortgage Contingency

Some sellers will ask the buyer of a house to waive the mortgage contingency when the contract is drawn up. While this could potentially save everyone from a scramble at the end of the process, it places the buyer in a risky position. In order to get a contract in place for the house, the buyer had to place money in escrow. This earnest money deposit, as it is called, ranges from a few thousand dollars up to half of the down payment amount. If there is a mortgage contingency in the contract, the buyer would get this money back in the event he could not obtain financing. If he waives the contingency, then he would forfeit the earnest money deposit.

Early Preparation Makes for a Smooth Closing

If you are in the market to buy a house, you can prepare yourself for a smooth loan process by getting your financing in place before you make an offer on a specific property. Doing this has multiple advantages. First, you will have a realistic sense of whether your income and credit can support the mortgage you want. Second, having a full loan approval when you make your offer will set it apart from offer bidders with weaker approvals. Finally, you will save yourself and the other parties of the transaction from a mad scramble to fulfill underwriting conditions as the closing date is approaching.

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