Financing Contingency Example: A Comprehensive Guide

Introduction

A financing contingency is an essential part of a real estate transaction that provides protection to both buyers and sellers. In this comprehensive guide, we will explore what a financing contingency is, how it works, and when to use it. We will also provide examples of financing contingency clauses and discuss their importance in securing a successful home purchase.

What is a Financing Contingency?

A financing contingency is a clause in a purchase contract that allows the buyer time to obtain financing for the purchase of a home. It provides the buyer with an opportunity to back out of the contract if they are unable to secure the necessary financing. Similarly, the seller can terminate the contract if the buyer fails to obtain financing within the specified timeframe.

Passive Contingency

A passive contingency is a type of financing contingency that allows the buyer to terminate the contract if they are unable to obtain financing. This type of contingency puts the burden on the buyer to secure financing and does not require any action from the seller.

Active Contingency

An active contingency, on the other hand, requires the seller to take certain actions to assist the buyer in obtaining financing. For example, the seller may be required to provide documentation or cooperate with the buyer's lender to facilitate the financing process.

How Does a Financing Contingency Work?

When a financing contingency is included in a purchase contract, it typically includes a timeframe within which the buyer must obtain financing. This timeframe is known as the contingency period. During this period, the buyer can work with their lender to secure a loan and provide the necessary documentation. If the buyer is unable to obtain financing within the contingency period, they can notify the seller and terminate the contract.

Types of Financing Contingencies

There are two main types of financing contingencies: active and passive. Active contingencies require the seller to take certain actions to assist the buyer in obtaining financing, while passive contingencies place the burden on the buyer to secure financing without any obligation from the seller.

Active vs. Passive Contingencies

Active contingencies are more common in competitive real estate markets where sellers may be more willing to cooperate with buyers to secure a sale. Passive contingencies, on the other hand, are often used in situations where the buyer has a strong financial position and is confident in their ability to obtain financing.

Examples of Financing Contingency Clauses

Here are a few examples of financing contingency clauses:

• The buyer's obligations under this contract are contingent upon the buyer obtaining financing to pay the balance on the purchase price. The buyer must present to the seller a binding commitment letter from a lender by [date]. If the buyer fails to obtain financing within the specified timeframe, either party may terminate this contract.
• This contract is contingent upon the buyer obtaining financing at an interest rate not to exceed [percentage]. If the buyer is unable to obtain financing at the specified interest rate within [number] days, either party may terminate this contract.

Importance of Financing Contingencies

Financing contingencies are crucial for both buyers and sellers in a real estate transaction. For buyers, a financing contingency provides the necessary time and protection to secure financing and avoid the risk of losing their earnest money. For sellers, a financing contingency ensures that the buyer is financially capable of completing the purchase and reduces the risk of a failed transaction.

Conclusion

A financing contingency is a vital component of a real estate purchase contract that provides protection and flexibility to both buyers and sellers. By understanding how financing contingencies work and the different types available, buyers and sellers can navigate the homebuying process with confidence. Whether it's an active or passive contingency, a financing contingency allows buyers to obtain the necessary financing and sellers to ensure a successful transaction.