How You Can Feel More Confident About Making an Offer Without a Financing Contingency
By Doug Goelz, Mortgage Services
In the current market, contingencies in the purchase contract can make the difference between having an offer accepted or not. The financing contingency in a purchase contract allows buyers to get out of the contract without penalty if their financing is not approved. Sellers don’t like contingencies because they mean that buyers can cancel the contract without penalty 7 to 21 days (typically) AFTER the contract is ratified.
One way borrowers can feel confident about making an offer without a financing contingency, and thus making their offer more attractive to the sellers, is to have their loan underwritten even before the property is identified. In the lending world, an application submitted for underwriting before a property is in contract is called a ”TBD” because the property is To Be Determined.
Here is what happens with a TBD: you complete an application and submit the documentation for income (e.g., pay stubs, W2s, and /or tax returns), assets (e.g., bank statements), and credit (the credit report your lender obtains). No address is provided for the property, although some lenders require a city and state. On the application, an assumption is made about the price of the property, the amount of the down payment, and the interest rate.
Using these assumptions plus the income, asset, and credit documentation, the underwriter reviews the loan to make sure it meets all guidelines, and gives conditional approval. Final approval of the loan is subject to various conditions including the purchase contract and appraisal of the property once it is identified.
With a conditional approval of a TBD application, potential borrowers can feel more confident they have the necessary income and assets required for the financing described on the application (using the assumed purchase price, down payment, and interest rate). Potential borrowers may then feel more comfortable submitting an offer without having a financing contingency.
Here are some commonly asked questions about TBDs:
Why doesn’t everyone submit a TBD application? Many lenders won’t accept TBD applications. They will process applications for purchase loans only if they are submitted with a ratified purchase contract.
Is having your loan pre-underwritten a guarantee the loan will get final approval? No. There are several reasons:
- The appraised value and condition of the property are key to getting final approval on a loan. If the property appraises too low and the borrower cannot come up with cash needed to close, the loan will not close. If the condition of the property is not acceptable to the lender, the loan will not close.
- Facts and assumptions used in the initial underwriting process can change. For example, if you lose your job or switch from a salaried job to self-employment, the loan may not close.
- Lender guidelines change. If the guidelines used in theinitial underwriting become more stringent by the time a property is identified and the contract ratified, the borrower may not meet the new guidelines and the loan may not close.
- With a TBD application, the underwriter generally looks at income and assets reported and makes a decision based on the amounts. If the sources of income and/or assets are complex and varied (e.g., if they come from a trust or an S-Corp), the additional documentation required as conditions of final approval probably will not be reviewed until the application for the specific property, along with the ratified contract, are submitted. In some cases, an underwriter may not give final approval on the loan after reviewing the detailed documentation once the property is identified.
What are the drawbacks of submitting a TBD?
- The lender doing the initial underwriting of the TBD application may not have the best rates when it is time to submit the application with the property identified.
- Depending how far in advance of getting into contract a TBD application is submitted, documentation, including a credit report, may have to be updated. Obtaining a 2nd credit report a few months after a TBD is submitted can have a small, negative impact on the credit scores.
If you are interested in submitting an offer without a financing contingency, discuss with your lender if a TBD application is possible or necessary to give you the assurance you want before you make an offer without a financing contingency.
Questions? Feel free to get in touch with me at 415-730-4665 or firstname.lastname@example.org