WHEN IS A FINANCING CONTINGENCY USED?

You need a financing contingency if you are obtaining a loan for your home purchase and cannot afford to purchase it in cash if the loan falls through. This contingency is meant to allow you to finalize your loan. 

WHY IS IT BENEFICIAL?

The financing contingency allows you to void the sales contract if you are rejected for the loan. However, very few contracts fall apart due to this contingency since most listing agents and sellers only accept contracts where the buyers are pre-approved with a lender. We generally recommend a financing contingency if you are unable to pay cash for the purchase, but it is especially a good idea if you are worried about possibly losing your job or if your financial situation might change before you go to settlement. You want to be sure you are protected. 

HOW DOES THE CONTINGENCY WORK?

A typical financing contingency can range from around 10-21 days depending on the situation. The contingency can be set to automatically expire at the deadline or not have an expiration date. 

You will choose from two financing contingency options: 

1. Financing Contingency with Automatic Extension: this means the financing contingency will automatically continue up to settlement if you don’t deliver a lender rejection letter. However, after the financing deadline, the seller may deliver notice to the buyer that the buyer has three days to void the contract. If the buyer does not void the contract within those three days, the financing contingency is removed and the contract remains in full force without the financing contingency. The buyer may void the contract by delivering the seller a lender rejection letter any time prior to the removal of this contingency.
2. Financing Contingency with Automatic Expiration: the financing contingency will automatically expire at the predetermined financing deadline. The buyer may void the contract by delivering the seller a lender rejection letter, or may satisfy the contingency by delivering the seller a loan commitment any time prior to the financing deadline.

In a competitive situation, choice 2) Financing Contingency with Automatic Expiration is often more preferable to a seller if you are including a financing contingency.

At the end of the contingency period, the purchaser has four options: 1) remove the contingency, 2) decide to move forward to settlement without the protection of the financing contingency, 3) provide notice voiding the contract, or 4) satisfy the financing contingency by providing a loan commitment letter prior to the deadline.

WANT MORE INFO?

Reach out to us or chat with your lender for a more detailed discussion of the contingency. We’re here to help!