Why do I need to go to a lender? Can’t we just put in the offer and if it’s accepted, I’ll figure it out?
These are common questions from buyers who are looking to minimize the “up front” hassle of figuring out how they are going to pay for a real estate purchase. Of course, this makes sense. Why go through a pre-approval application if you don’t end up with a contract on the property? Defying this logic is the actual process of submitting an offer with a Realtor on a property.
The VAR (Vermont Association of Realtors) Purchase and Sale Agreement has a “Financing Contingency” section that all buyers should be made aware of well before finding or putting an offer in on a property. The Financing Contingency paragraph must be completed if you are not paying cash for your purchase. If you are not paying cash, then you are getting a mortgage loan on the property. This contingency has many layers, let’s break them down:
1. What is the amount of the purchase that you are financing as a percentage? For example, if your downpayment is 20% then the amount that you are financing is 80%.
2. How many years are you going to finance this purchase? 15 years? 30 years?
3. What interest rate will be prohibitive for the mortgage loan? If the interest rate is 7.0%, for example at the time of the contract, and then it increases to, say, 7.1% are you still able to qualify for a loan?
4. Are you paying any points to the lender? Is this factored into your loan approval?
5. When your offer is accepted and you have a contract, fully executed Purchase and Sale Agreement, then you must apply for a mortgage loan on the property. This is different from a pre-approval application.
This is a very detailed Financing Contingency. Also included in this paragraph is a “checkbox” specifically asking if you have obtained a lender letter concerning financing.
In conclusion, you will need to figure out much of your financing prior to submitting an offer. We can recommend lenders that we have had successful transactions in the past. Reach out if you are ready to take the first step in purchasing.