When you`re in the process of buying a home, one thing you might hear about is a purchase agreement. A purchase agreement is a legally binding contract between a buyer and seller outlining the terms and conditions of the sale. Typically, a purchase agreement is signed before the buyer applies for a mortgage loan.

Why would you sign a purchase agreement before loan approval?

One reason is that a seller may require it. If a seller has multiple offers on their property, they may choose to accept an offer from a buyer who has already signed a purchase agreement, even if that buyer hasn`t yet been approved for a loan. This is because a signed purchase agreement carries more weight than a verbal agreement or a letter of intent.

Another reason is that a purchase agreement can provide more protection for both the buyer and seller. A purchase agreement typically includes contingencies that allow the buyer to back out of the sale if certain conditions aren`t met, such as the home inspection revealing major issues or the buyer being unable to secure financing. By signing a purchase agreement, both parties have a clear understanding of what is expected of them and what will happen if certain conditions aren`t met.

However, it`s important to note that signing a purchase agreement before loan approval does carry some risks. If the buyer is unable to secure financing, they may lose their earnest money deposit or be subject to legal action from the seller. It`s important for the buyer to fully understand the terms of the purchase agreement and to work closely with their lender to ensure they are able to secure financing before signing.

In conclusion, signing a purchase agreement before loan approval can provide benefits for both the buyer and seller, but it`s important to understand the risks involved. Buyers should work closely with their lenders and real estate agents to ensure they are making the best decision for their individual situation.