What is a Financing Contingency in a real estate transaction?
A financing conditions the sale on the buyer obtaining a loan. If the buyer is unable to obtain a loan the contract terminates. If the buyer terminates and has complied with the contingency terms the buyer would be entitled to a return of their earnest money.
Unless a buyer is paying with cash, the majority of purchase and sale contracts include a financing contingency. There may be a circumstance where the buyer does not include one – maybe because there are multiple offers and they want to make their offer stronger or maybe because the buyers financing is already approved and they are very certain they will not have a problem getting a loan. If a buyer does not include this contingency and they cannot close because the loan is not approved the buyer would forfeit their earnest money. Also if this contingency is not included they will not have the protection of the appraisal contingency – see my video on appraisal contingency on my channel – unless they add in a separate appraisal contingency addendum.
The financing contingency specifies that a purchase is contingent upon a certain type of loan which must be specified – the most common are conventional or fha, how much the buyer will be putting down and when they are required to make application for the loan. If a buyer fails to make application by the due date, or changes loan types or lenders without consent of the seller the finance contingency is automatically waived so it is very important for 1) a buyer to be preapproved and know this information and 2) for the buyers agent to fill this out correctly.
There also is verbiage included giving the listing agent the right to speak with the buyers lender and a process for that as well as a right to terminate clause and process after a specified timeframe. This is a protection for the seller so they are not keeping their home tied up and off the market for a buyer who’s loan is failing.
This form is also used if the buyer is asking for closing costs to be paid by the seller and has an appraisal contingency built in. I will go over the appraisal contingency in my next upcoming video so be sure to watch it!
If you are a seller – in order to have the most assurance of a sale you will want to be sure you have tight timelines for the the loan application, the request for loan information, and the right to terminate notice. You also want to be sure your agent is following the timelines closely. You will also want to be sure the buyer is preapproved for the loan type they are stating in their contingency and that they have the funds to close.
The financing contingency is a very important contingency for both the buyer and seller and can be a bit confusing. If you have any questions regarding it please comment below.
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