Financing Contingency Examples: A Comprehensive Guide

When buying a home, one of the most important aspects to consider is financing. The process of obtaining financing can be complex and overwhelming, which is why many buyers choose to include a financing contingency in their purchase contract. In this comprehensive guide, we will explore what a financing contingency is, how it works, and provide examples of different types of financing contingencies.

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 gives the buyer the right to terminate the contract if they are unable to secure financing within a specified time frame. This contingency is designed to protect the buyer from losing their earnest money deposit if they are unable to obtain financing.

How Does a Financing Contingency Work?

A financing contingency typically includes a specified time frame, known as the contingency period, during which the buyer must secure financing. If the buyer is unable to obtain financing within this period, they can terminate the contract and receive a refund of their earnest money deposit.

During the contingency period, the buyer will work with their lender to complete the necessary steps to secure financing. This may include submitting financial documentation, completing a loan application, and obtaining a loan commitment from the lender. The buyer should consult with their agent and lender to understand the specific requirements and timeline for securing financing.

Types of Financing Contingencies - Active vs. Passive

There are two main types of financing contingencies: active and passive. An active financing contingency requires the buyer to actively seek out and apply for financing. The buyer is responsible for submitting loan applications and providing the necessary documentation to their lender.

A passive financing contingency, on the other hand, allows the buyer to rely on the seller to secure financing on their behalf. The seller must present a binding commitment from a lender stating that the buyer is approved for financing. If the seller fails to obtain financing for the buyer, the buyer can terminate the contract.

Financing Contingency Examples

Here are some examples of financing contingencies that you may come across:

1. Financing Contingency Sample Clauses

Sample clauses are often provided by legal resources and can be used as a starting point for drafting a financing contingency clause. These clauses outline the buyer's obligations and the conditions for obtaining financing.

2. Mortgage Contingency

A mortgage contingency is a specific type of financing contingency that is commonly used in real estate transactions. It states that the buyer's obligations are contingent on their ability to obtain a mortgage loan.

3. Appraisal Contingency

An appraisal contingency is another type of financing contingency that protects the buyer in the event that the home does not appraise for the purchase price. If the appraisal comes in below the agreed-upon purchase price, the buyer can terminate the contract or renegotiate the price.

How & When to Use Financing Contingencies

Financing contingencies should be used in almost every home purchase to protect the buyer's interests. They provide a safety net in case the buyer is unable to secure financing or if there are issues with the property that could affect its value.

It is important to include a financing contingency in the initial purchase contract and to clearly define the contingency period and any other specific requirements. This will ensure that the buyer has sufficient time to secure financing and that both parties are aware of their rights and obligations.

Why Would You Not Have a Financing Contingency?

While financing contingencies are generally recommended for all home purchases, there may be certain situations where a buyer chooses not to include one. For example, if a buyer is confident in their ability to secure financing quickly and has a strong financial position, they may choose to waive the financing contingency to make their offer more attractive to the seller.

However, waiving a financing contingency can be risky, as it leaves the buyer vulnerable to losing their earnest money deposit if they are unable to secure financing. It is important to carefully evaluate the risks and consult with a real estate professional before deciding to waive a financing contingency.

Consult With Your Agent and Lender

When navigating the world of financing contingencies, it is crucial to consult with your real estate agent and lender. They can provide guidance and expertise to help you understand the specific requirements and implications of including or waiving a financing contingency in your purchase contract.

Remember, the goal of a financing contingency is to protect your interests as a buyer and provide you with the necessary time and flexibility to secure financing for your new home.

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If you have any questions or need assistance with financing contingencies or any other aspect of the home buying process, we're here to help. Contact us today for a free market report or to speak with one of our experienced agents.