A financing contingency is a clause in a home purchase and sale agreement. In most cases it states the buyer’s offer is contingent on securing financing for the purchase of the house.
A Financing Contingency Protects The Buyer
This kind of clause is used by a buyer to protect themselves in the event they are unable to secure financing. Typically the contingency establishes a clear time period in which the buyer will apply for a mortgage and/or close on the loan. It will normally outline the type of loan the buyer intends to obtain, the size of their down payment, the term of the loan, and the interest rate.
Often times the contingency will stipulate that the buyer will get their earnest money back if they are unable to secure financing.
Earnest Money Shows the Buyer’s Commitment
To show the seller they are serious about their offer, buyers often put down what is known as earnest money. Normally this is between one and five percent of the sale price.
If a seller accepts the offer, this earnest money is held in escrow until the loan closes. At that time, it is applied to the buyer’s down payment.
Sometimes Buyers Waive Their Contingency to be More Competitive
In today’s ultra competitive market, buyers are looking for every opportunity to make their offer stand out from the crowd. Sometimes this includes waiving their financing contingency.
As a buyer, waiving your contingency isn’t bad as long as you are prepared to accept the financial risk. You’ll need to pay close attention to the wording of your contract. By waiving your contingency, you may not only lose your earnest money, you could be obligated to purchase the house, with or without financing.
Some Current Homeowners Use a Financing Contingency When Shopping for a New Home
There is a lot of capital tied up when you own a home. Not only does this limit the amount of cash you have on hand for a down payment, it limits the amount of credit a lender is willing to extend you.
In most cases, current homeowners are not in a position to carry two mortgages at once. This means they must first sell their current home to purchase a new one. To avoid multiple moves and lofty rent payments, many homeowners house hunt with a financing contingency. This financing contingency allows them to make an offer on a new home that’s contingent on selling their current home.
Have additional questions about financing contingencies? Contact me today.
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