Introduction

A financing contingency clause is an important aspect of a real estate purchase contract. It protects the buyer by allowing them to back out of the deal if they are unable to secure financing for the purchase. In this article, we will explore financing contingency clauses in detail, including examples and how they can benefit both buyers and sellers.

What is a Financing Contingency Clause?

A financing contingency clause is a provision in a real estate purchase contract that makes the buyer's obligations contingent on their ability to obtain financing to pay the balance on the purchase price. This clause protects the buyer from being legally obligated to complete the purchase if they are unable to secure the necessary financing.

Financing Contingency Sample Clauses

Let's take a look at some financing contingency clause examples:

• Clause 1: The Buyer's obligations under this Agreement are contingent upon the Buyer obtaining financing from a reputable financial institution at an interest rate not to exceed 4%.
• Clause 2: If the Buyer is unable to obtain financing within 45 days from the date of this Agreement, either party may terminate this Agreement without penalty.
• Clause 3: The Buyer must present to the Seller a binding commitment letter from a lender within 30 days of the acceptance of this Agreement.

How Real Estate Transactions Work

Before we delve deeper into financing contingency clauses, let's first understand how real estate transactions work. When a buyer and seller agree on the terms of a property sale, they enter into a purchase contract. This contract outlines the rights and obligations of both parties and specifies the conditions that must be met for the sale to proceed.

Real Estate Contingencies

Contingencies are provisions in a purchase contract that allow the buyer or seller to cancel the agreement under certain specified conditions. These contingencies provide a level of protection and flexibility for both parties involved in the transaction.

Key Takeaways:

• A financing contingency allows the buyer time to obtain financing and protects them from being legally obligated to complete the purchase if they are unable to secure financing.
• Real estate contingencies provide a level of protection and flexibility for both buyers and sellers.

Appraisal Contingency

An appraisal contingency is a provision in a purchase contract that allows the buyer to back out of the deal if the appraised value of the property is lower than the agreed-upon purchase price. This contingency protects the buyer from overpaying for a property.

Home Sale Contingency

A home sale contingency is a provision in a purchase contract that allows the buyer to back out of the deal if they are unable to sell their current home within a specified time frame. This contingency is often used by buyers who need to sell their existing home in order to finance the purchase of a new one.

Inspection Contingency

An inspection contingency is a provision in a purchase contract that allows the buyer to have the property inspected by a professional inspector. If the inspection reveals significant issues or defects, the buyer may negotiate repairs or credits with the seller or choose to terminate the agreement.

Financing Contingency

A financing contingency, as discussed earlier, allows the buyer to back out of the deal if they are unable to secure financing for the purchase. This contingency protects the buyer from being legally obligated to complete the purchase if they cannot obtain the necessary funds.

How Does a Home Loan Contingency Work?

A home loan contingency is a specific type of financing contingency that pertains to the buyer's ability to obtain a mortgage loan. This contingency allows the buyer to back out of the deal if they are unable to secure a loan with the specified terms and conditions.

How Long is a Home Financing Contingency?

The length of a home financing contingency period can vary depending on the terms agreed upon by the buyer and seller. Typically, this period ranges from 30 to 60 days, allowing the buyer sufficient time to secure financing.

Types of Financing Contingencies - Active vs. Passive

There are two main types of financing contingencies: active and passive.

Active Contingency

An active contingency requires the buyer to take specific actions within a specified time frame to obtain financing. This may include submitting loan applications, providing required documentation, and meeting with lenders.

Passive Contingency

A passive contingency, on the other hand, does not require the buyer to take any specific actions. Instead, it automatically protects the buyer if they are unable to secure financing within the specified time frame.

How & When to Use Financing Contingencies

Financing contingencies are commonly used in real estate transactions to protect the buyer's interests. Here are some situations when a financing contingency may be appropriate:

• When the buyer is relying on a mortgage loan to finance the purchase.
• When the buyer wants to ensure they have enough time to secure the best financing terms.
• When the buyer wants protection in case their loan application is denied.

Why Would You Not Have a Financing Contingency?

While financing contingencies are generally beneficial for buyers, there are situations where a buyer may choose not to include this contingency in their purchase contract. Here are some reasons why:

• The buyer has sufficient funds to purchase the property without financing.
• The buyer has already been pre-approved for a mortgage loan.
• The buyer wants to make their offer more competitive in a hot housing market.

Conclusion

A financing contingency clause is an essential component of a real estate purchase contract. It protects the buyer by allowing them to back out of the deal if they are unable to secure financing for the purchase. Both buyers and sellers can benefit from understanding the implications of financing contingency clauses and how they can impact a real estate transaction.