The financing contingency protects buyers who need a mortgage by giving them an exit if their loan application is denied. The contingency typically specifies the loan type, interest rate cap, loan amount, and the deadline for obtaining loan commitment. If the buyer fails to secure financing by the deadline despite good faith efforts, the contract can be voided. Buyers who waive this contingency risk losing their earnest money if they cannot obtain a loan.
A buyer includes a financing contingency requiring mortgage approval for a $280,000 conventional loan at no more than 7% interest within 30 days. The buyer's lender denies the application due to insufficient income. Because the financing contingency is in place, the buyer cancels the contract and receives a full refund of the earnest money deposit.
Remember that the financing contingency deadline is separate from the closing date — the buyer must obtain loan commitment by the contingency deadline, not by closing. Exam questions may ask what happens if a buyer waives the financing contingency and then cannot get a loan — the buyer is in breach and may lose the earnest money.
Related Terms
Related Concepts
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Consideration is something of value exchanged between parties to a contract, making the agreement legally binding. It can be money, a promise to act, a promise to refrain from acting, or anything else of value.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Frequently Asked Questions
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