Derek makes an offer on a Germantown home with a financing contingency specifying an FHA loan. The seller accepts. During the contingency period, Derek's lender informs him he qualifies for a conventional loan but not an FHA loan due to the property's condition. Derek wishes to terminate and recover his earnest money. The seller argues that since Derek qualifies for a conventional loan, the financing contingency is satisfied. Which of the following best reflects the correct legal analysis under Tennessee law?
Correct Answer
A) Derek may terminate and recover his earnest money because the contingency specified an FHA loan, which was not obtainable, and the seller cannot substitute a different loan type
In Tennessee, a financing contingency is enforceable according to its specific terms. If the contract specifies an FHA loan and that particular type of financing cannot be obtained—even if another loan type is available—the contingency has not been satisfied. Derek specified an FHA loan, which has distinct requirements including property condition standards. Since the property did not qualify for FHA financing, Derek may properly invoke the contingency and recover his earnest money. The seller cannot unilaterally substitute a different loan type to satisfy the contingency.
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Related Topics & Key Terms
Key Terms:
Related Concepts
An appraisal contingency allows the buyer to cancel or renegotiate the contract if the property's appraised value comes in lower than the agreed-upon purchase price. This contingency protects buyers from overpaying.
An assignment of contract transfers one party's rights and obligations under a contract to a third party called the assignee. The original party, known as the assignor, transfers their contractual position to someone who was not originally part of the agreement.
A bilateral contract is an agreement in which both parties exchange promises and are both obligated to perform, while a unilateral contract is one in which only one party makes a promise and the other party is not obligated to act.
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