Should I Waive the Mortgage Contingency in My Offer?

What are the risks if I waive the mortgage contingency?

When you decide to waive the mortgage contingency, you’re essentially taking a gamble in the homebuying process. This move can make your offer more appealing to sellers, but it also comes with significant risks that you need to carefully weigh. Here are some of the key risks associated with this decision:

• You lose the house to another buyer: If your financing falls through and you’ve waived the mortgage contingency, the seller has the right to cancel the contract and sell to someone else. This means you could miss out on the home you’ve set your heart on, despite all your efforts.
• You lose your deposit: One of the biggest risks is the potential loss of your earnest money deposit. Without the protection of a mortgage contingency, if you fail to secure financing, the seller may be entitled to keep your deposit as compensation for what can technically be considered a breach of contract.
• Legal complications: Without the usual mortgage contingency safety net, you could find yourself in a binding contract with no easy way out if your financing falls through. This can lead to complicated legal turbulence, potentially involving a breach of contract claim or a lawsuit for damages and associated penalties.
• Stress and uncertainty: The process of buying a home without a mortgage contingency can be incredibly stressful. The uncertainty of whether your financing will be approved, coupled with the potential financial consequences, can create a high-pressure situation.
• You pay higher costs if the lender appraisal comes in low: If you waive the mortgage contingency and the home’s appraisal by your lender is lower than the purchase price, you might be required to cover the difference in cash. This situation can significantly increase your planned out-of-pocket expenses. (More on this in our example scenario below.)

When considering the choice to keep or waive the mortgage contingency, it’s about balancing the desire to make a competitive offer with the need to protect your financial interests. It can be a tricky tightrope to walk and still maintain peace of mind.

Scenario: If you waive the mortgage contingency…

To illustrate the potential pothole you may find in waiving a mortgage contingency, let’s walk through a typical 3-stage scenario.

1. You’re preapproved, and you make an offer

You received preapproval from your lender to purchase a home valued at $600,000, with a 20% down payment of $120,000 from your savings. This arrangement implies financing a $480,000 mortgage (80%). The preapproval was instrumental in getting your offer accepted by the seller. However, it’s important to remember that this amount isn’t guaranteed until the lender’s appraisal confirms the home’s value.

2. The appraisal comes in low

In a scenario where the property appraisal is lower than the purchase price, your lender will likely act to minimize their risk. This might involve reducing the loan amount they’re willing to offer or even denying financing. If you had a mortgage contingency in place, you could exit the deal while keeping your earnest money deposit and avoiding penalties. Without this contingency, you’re now in a precarious position, needing to secure alternative financing swiftly to meet the contractual deadline, and your $120,000 deposit is at risk.

3. You must make up the difference

Most often, a low appraisal doesn’t lead to outright cancellation of financing. Common lender responses include:

• Reducing the approved loan amount: If the lender lowers their approved financing amount from $480,000 to $450,000 due to the low appraisal, you would need to find an additional $30,000 for the down payment.
• Increasing the mortgage interest rate: A higher interest rate means your monthly mortgage payments will be more expensive for the life of the loan.

In both responses, you’ll face increased costs, either through a larger down payment or higher loan payments, adding financial strain to your home purchase and your ongoing family budget.

How to reduce risk when waiving a mortgage contingency

If you love the home and want to make your offer as competitive as possible by waiving the mortgage contingency, or if the seller asks you to waive the clause, here are some things you can do to minimize the risks:

1. Work closely with your lender in advance: Make certain the mortgage provider and you both have a clear and realistic understanding of your financial strength, credit score, and what monthly payments you can safely handle.

2. Have funds in reserve: Give yourself some money wiggle room in case your credit score or financial standing drops between the time you apply for your home loan and your closing date.

3. Heed the advice of your loan officer and agent: Trust the real estate professionals you’re working with. They know what you need to do — and what not to do — to successfully close your home sale.

4. Consider a Buy Before You Sell program: If you already own a home, innovative real estate solution companies like HomeLight can help you streamline the entire buy/sell process and get you preapproved and into your new home before you even sell your current home.

Here is how HomeLight Buy Before Your Sell works:

Weigh the benefits before waiving a mortgage contingency

Waiving a mortgage contingency is a decision that should not be taken lightly. It’s a strategy that can give you an edge in a competitive housing market but comes with substantial risks. Here are the key takeaways to remember:

• Understand what a mortgage contingency is: It’s a clause that protects you if you can’t secure financing, allowing you to back out of the deal without losing your deposit.
• Consider your financial stability: Assess your financial situation thoroughly and consult with a mortgage professional before deciding to waive this clause.
• Be aware of the risks: Losing your deposit, facing higher costs due to a low appraisal, and legal complications are real risks that come with waiving a mortgage contingency.
• Prepare for different scenarios: Understand what could happen if the appraisal comes in low or if your financing falls through. Have a plan in place for these situations.
• Consult with experts: Always seek advice from real estate professionals, financial advisors, and legal counsel to make an informed decision.

Remember, every home purchase is unique, and what works for one buyer may not be the best for another.

At HomeLight, we partner with the largest network of top agents in the U.S. who have experience with mortgage contingencies. Partner with an expert who can custom-fit a home purchase offer that’s right for you. Ask your agent about HomeLight’s Buy Before You Sell program, which can take the uncertainties out of your homebuying journey.

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