Financing Contingencies Explained
In a purchase agreement or home sale, a financing contingency is a clause explaining how the offer or deal is conditional on the buyer gaining financing for the purchase. Buyers normally use this to give themselves a set period of time to apply for a mortgage. It also declares which type of loan they plan on getting, any loan terms, the interest rate, and a down payment amount.
Why is a Financing Contingency important?
This clause protects the buyer from any potential legal complications in the event that the deal does not close or if they are unable to get a loan. This clause can get very specific but it ensures that the buyer is not penalized by any legal ramifications for being unable to get the financing that would allow them to purchase the home. If the buyer cannot get approved for a loan, most financing contingencies will allow for the buyer to receive their Earnest Money Deposit back and walk away without penalty.
Strong Markets vs Weak Markets
The faster the pace of the market is, the less contingencies the seller will want to deal with. Knowing this, sometimes buyers competing for the same home will often be willing to drop certain contingencies (appraisal and financing related) if it means the seller will consider their offer more. On the other hand, if the demand in the market area is slow, a seller has less options and is normally willing to choose any offer, even if there were more contingencies.
Buyers who do choose to waive contingencies do so at significant financial risk though. Not only could they lose their Earnest Money Deposit, they might be required to purchase the home without financing help, or even be drawn into a lawsuit.
Earnest Money Deposits
Many buyers make was is called an Earnest Money Deposit to prove to the seller the are serious about committing and completing their offer on the home. This amount is normally around 1% to 5% of the home’s value, and if the deal goes well, ends up being released from escrow to be used as part of the down payment. The Earnest Money Deposit is normally what financing contingencies state will be returned to the buyer if they are unable to get approved for a loan.
Fine Print: Read It
It is always recommended to read the fine print when you are using a financing contingency. Know all of the terms that are stated and make sure that your lender or real estate agent clarifies anything you don’t understand before you sign it.