The Buyer's Guide to Real Estate

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How to Use a Financing Contingency Effectively When Buying a House

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When you get ready to write an offer on a house you want to buy, you may want to consider adding a financing contingency. A financing contingency will allow you to get out of the contract if you cannot obtain financing, but that is not all. You could word it in a way that allows you to get out of the contract if you cannot obtain a loan that meets your needs and desires. Here are several things to understand about this.

What a typical financing contingency is

In most real estate contracts, the buyer will include a statement that says the deal will only go through if he or she can obtain financing to buy the house. In other words, this means that you will not be tied to buying this house if you cannot get a loan. This is a standard type of contingency you will find on most purchase offers for homes, and you should make sure you include this. 

You should know that the seller has the right to reject your offer if he or she doesn't like the price or the contingencies, but most sellers will not reject an offer if it has a financing contingency like this, especially if the buyer has been pre-approved from a lender already.

Ways to protect yourself if you cannot get a good loan

If you want to fully protect yourself when buying a house, you could even include stating that the loan you get must have a certain interest rate on it. For example, if you do not want to pay an interest rate that is over 4.5% on the house loan, you could write in your contract that the deal is only valid if you can get a loan with an interest rate that is 4.5% or less.

You could also state that you must be able to get approved for a certain type of loan, such as an FHA loan or a conventional loan. Each loan type available has different requirements, and you can include something like this in your contract if you want to.

Buying a house is a huge ordeal, and it might be the costliest purchase you ever make in your life. If you want to protect yourself and your budget, you may want to include a financing contingency in your purchase offer. To learn other ways to protect yourself, talk to a real estate agent near you.