Mortgage pre-approval can help those hunting for homes understand their potential budgets. Once aspiring buyers know how much mortgage they can secure, it becomes easier to identify properties that they can afford.
People often take for granted that a pre-approval letter ensures that they have the financing necessary to purchase a home if a seller accepts their offer. However, an individual’s circumstances can change after they negotiate a purchase agreement with the seller. They may find themselves unable to secure the mortgage and complete the transaction. What could happen in such a situation?
Buyers could lose their earnest money
Individuals making offers on real estate usually deposit earnest money with their agents or sometimes with a seller’s agent if they do not have their own representation. Earnest money usually represents at least 1% of the purchase price offered for the property, if not significantly more. It counts toward the down payment and serves as proof that the buyer intends to complete the transaction.
If buyers cannot follow through with their offers, sellers can potentially make a claim to retain some or all of the buyer’s earnest money. It is therefore critical for buyers to add contingencies to their offers to protect their earnest money from seller claims. A financing contingency allows the buyer to retain their earnest money if they must cancel the closing because they cannot obtain a mortgage.
Mortgage preapproval is not necessarily a guarantee that a buyer can obtain a mortgage after bidding on a property. Working with a real estate attorney can help buyers limit their financial exposure by adding the right terms to their offers and purchase agreements to protect them if they must cancel a real estate closing.