Financing Contingency
TLDR: Getting financing is the most important step in getting to closing. Make sure you have enough liquid assets to cover the down payment and closing costs, and be prepared to share every detail of your financial history with the lender.
Your Loan: The Long Pole in the Tent
Obtaining money from a lender is one of the most significant barriers to homeownership. Unlike the other contingencies, there’s not much negotiation that can occur if your financing falls through–it’s quite literally a deal breaker.
By now, you should already have been pre-qualified and/or pre-approved. These are the remaining steps to obtaining a mortgage:
Pre-qualification
Pre-approval
Approval of your financial situation (upon pulling your credit score and further inspecting your documents)
Underwriter's approval of the home purchase (upon analyzing financials of both you and the property)
At this time, you'll want to start preparing for the down payment and closing costs. This may include selling stock or bonds, completing any necessary paperwork for government subsidies, grants, or loans, coordinating with aid programs, or completing the necessary steps to borrow money from your 401k.
What kind of documents will the lender ask for?
After the financial crisis of 2008, strict financial regulations were implemented and lenders stopped handing out mortgages like candy. As a result, the amount of documentation required by lenders skyrocketed. These documents serve two purposes: First, they're verification that your financial situation qualifies you to buy the property. Second, it's proof that the money you're using as a down payment is not laundered. Specific documents required will vary by lender, but you'll likely need to have the following on hand:
Bank statements
Pay stubs
Previous years' tax returns
Brokerage account statements
Letters from giftors or documentation for large deposits
What can I do if I'm not approved?
No buyer wants to be in this situation, even though you'll get your earnest money deposit back if you've included this contingency. Your options include finding an alternate lender, or you can simply back out of the contract, improve your financial situation, and try again at a later date or with a less expensive property. Regardless of what you choose, you'll need to consult with the seller and agree on the way forward in writing.
Tip: Talk with the Seller
If your loan is not approved but you’re still committed to making the purchase, sometimes you can ask the seller to provide you with more time to find a different lender with less strict lending criteria (although you may end up paying more in interest with a higher interest rate). The last thing a seller wants to do is go through the hassle of putting the property back on the market again. However, if time is of the essence for them because their purchase of another property depends on this sale, they may have no choice but to re-list.