The Importance of a Financing Contingency Clause in Home Purchase Contracts

When buying a home, one of the most crucial aspects to consider is financing. Unless you're able to purchase the property with cash, you'll likely need to obtain a loan to finance the purchase. However, securing financing can be a complex process, and there are risks involved for both buyers and sellers. That's where a financing contingency clause comes into play.

What is a Financing Contingency?

A financing contingency is a clause included in a home purchase contract that gives the buyer time to obtain financing. It allows the buyer to back out of the contract if they are unable to secure a loan within the specified timeframe. This contingency protects the buyer from losing their earnest money deposit if they are unable to secure financing.

How Does a Financing Contingency Work?

When a financing contingency is included in a home purchase contract, it typically specifies a certain number of days for the buyer to obtain a loan commitment from a lender. During this period, the buyer can work with their lender to secure financing. If they are unable to obtain a loan commitment within the specified timeframe, they can terminate the contract and receive a refund of their earnest money deposit.

Types of Financing Contingencies - Active vs. Passive

There are two main types of financing contingencies - active and passive. An active contingency requires the buyer to take specific steps to secure financing, such as submitting loan applications and providing financial documentation. A passive contingency, on the other hand, only requires the buyer to make a good faith effort to obtain financing without any specific actions.

How & When to Use Financing Contingencies

Financing contingencies are commonly used in real estate transactions to protect the interests of both buyers and sellers. Buyers can include a financing contingency in their offer to ensure they have enough time to secure financing and avoid the risk of losing their earnest money deposit. On the other hand, sellers can also benefit from a financing contingency as it helps filter out potential buyers who may not be able to obtain financing.

Why Would You Not Have a Financing Contingency?

While financing contingencies are generally recommended for most home buyers, there are situations where a buyer may choose to waive this contingency. For example, if a buyer is confident in their ability to secure financing or is competing in a competitive market where offers without contingencies have a higher chance of being accepted, they may choose to waive the financing contingency. However, it's important to carefully consider the risks before making this decision.

Consult With Your Agent and Lender

When considering whether to include a financing contingency in your home purchase contract, it's essential to consult with your real estate agent and lender. They can provide valuable insights and advice based on your specific situation. Your real estate agent can guide you through the negotiation process, while your lender can help assess your financial readiness and likelihood of securing financing.

Key Takeaways

• A financing contingency is a clause included in a home purchase contract that gives the buyer time to obtain financing.
• There are two types of financing contingencies - active and passive.
• Financing contingencies protect both buyers and sellers.
• Buyers should carefully consider the risks before waiving a financing contingency.
• Consult with your real estate agent and lender to make an informed decision.

Conclusion

A financing contingency clause is a crucial component of a home purchase contract. It provides buyers with the necessary time to secure financing and protects their earnest money deposit. At the same time, it helps sellers filter out potential buyers who may not be able to obtain financing. If you're in the process of buying a home, be sure to discuss the inclusion of a financing contingency with your real estate agent and lender.