Financing contingency: What are the risks?

A financing contingency is a clause in a sales and purchase agreement. It states that the purchase of a property is contingent on a buyer securing a mortgage with which to buy the property.

Why is a financing contingency important?

It provides a buyer with protection from potential legal ramifications should the deal fail to close due to a lack of financing. This is always framed within a certain time period.

Should a buyer waive the financing contingency?

Only in certain circumstances. An offer without contingencies is far more appealing to a seller. It means that there are fewer hurdles to overcome in order for the deal to close. However, waiving contingencies carries more risk to a buyer. The only time a contingency should be waived is if the buyer is buying a property all cash and does not need to seek financing in order to close.

Even if a lender assures a buyer that they can qualify for a loan within the time period stipulated on the contract, dispensing with a mortgage contingency is a very risky move. It can be undertaken if the buyer has back up funds which they can liquidate to close on the property should the lender financing fail.

A bidding war is another situation where a buyer can consider closing all cash. It may be the difference getting a house over a buyer with a mortgage contingency.

Generally, a co-op sales contract does provide a provision for a mortgage contingency. So, in the case that a buyer cannot be approved for a loan they need to have the funds on hand to close.

What happens if a buyer waives their contingency and cannot get financing?

In such an instance, the seller would be able to keep the buyer’s deposit money.

A last resort

If a buyer is turned down for a conventional mortgage and needs to close quickly, a bridge loan through a hard money lender may be a last resort. The interest rate will be higher but the lending criteria are less strict than conventional banks. Usually their prime concern is that the buyer is able to put a down payment on the property. Immediately after the loan has closed, the buyer should look to refinance out of it. It is much easier to refinance a property you already own than to seek a mortgage for one you wish to buy.

Mortgage commitment letters: Be careful who sees them

A buyer and their attorney should keep a mortgage commitment letter strictly under wraps until it is a final commitment. That means brokers and buyer’s attorney’s should not see commitment letters that contain conditions such as “subject to appraisal”. If the appraisal comes in low, the bank will only lend up to 80 percent of the appraised value. Any doubt about the buyers ability to close may cause the seller to entertain other offers.