Finance Contingency Clause Example

Finance Contingency Clause Example: Protecting Your Home Purchase

A finance contingency clause, also known as a mortgage contingency, is a crucial element in a real estate purchase agreement, particularly for buyers relying on a mortgage to finance their home purchase. This clause protects the buyer by allowing them to back out of the deal without penalty if they are unable to secure financing within a specified timeframe.

Here’s a breakdown of a typical finance contingency clause and an illustrative example:

Core Components of a Finance Contingency Clause:

• Financing Amount: The clause will specify the amount of the loan the buyer needs to obtain.
• Interest Rate Cap: It often includes a maximum acceptable interest rate. This prevents the buyer from being obligated to proceed with the purchase if only offered a loan with an unreasonably high interest rate.
• Loan Type: The type of loan (e.g., conventional, FHA, VA) is identified. This is important as different loan types have different requirements.
• Contingency Period: A specific timeframe (e.g., 30 days) is established for the buyer to secure loan approval.
• Notification Deadline: This specifies the date by which the buyer must notify the seller if they are unable to obtain financing.
• Cancellation Terms: The clause outlines the buyer’s right to terminate the agreement and receive their earnest money deposit back if financing is denied.

Example Scenario:

Let’s say Sarah wants to purchase a house for $500,000. She plans to get a mortgage for $400,000 and put down $100,000 as a down payment. Her offer includes a finance contingency clause that reads something like this:

“This Agreement is contingent upon Buyer obtaining a written commitment for a mortgage loan in the amount of $400,000, at an interest rate not to exceed 7.0% per annum, for a term of 30 years, secured by the Property. Buyer shall diligently pursue obtaining said loan. Buyer shall have 30 days from the date of acceptance of this Agreement (the “Contingency Period”) to obtain said loan commitment. If Buyer is unable to obtain a written loan commitment within the Contingency Period, despite diligent efforts, Buyer shall notify Seller in writing no later than the 30th day of the Contingency Period. If Buyer provides such notice, this Agreement shall terminate, and the Earnest Money Deposit shall be returned to Buyer. If Buyer fails to provide such notice within the specified timeframe, this contingency shall be deemed waived, and Buyer shall be obligated to complete the purchase.”

What Happens in This Scenario?

• Sarah Applies for a Mortgage: Sarah immediately applies for a mortgage from multiple lenders.
• Scenario 1: Loan Approval: Within 25 days, Sarah receives a written loan commitment from a lender for $400,000 at an interest rate of 6.5%. The contingency is satisfied, and Sarah proceeds with the purchase.
• Scenario 2: Loan Denial: After diligent efforts, Sarah is denied a mortgage due to a recent job loss. On the 29th day of the Contingency Period, Sarah provides written notice to the seller that she has been unable to obtain financing. The purchase agreement terminates, and Sarah receives her earnest money deposit back.
• Scenario 3: High Interest Rate: Sarah receives a loan commitment, but the interest rate is 7.5%. Since this exceeds the 7.0% cap in the contingency clause, Sarah can notify the seller and terminate the agreement. She can also try to negotiate with the seller or the lender.
• Scenario 4: No Notice: Sarah is denied a mortgage but forgets to notify the seller within the 30-day Contingency Period. The contingency is deemed waived. Sarah is now obligated to complete the purchase, even if she cannot secure financing. This could result in Sarah losing her earnest money deposit and potentially facing legal action.

Key Takeaway: The finance contingency clause is a vital safeguard for buyers. It’s crucial to understand the terms of the clause, act diligently in seeking financing, and adhere to the notification deadlines. Consulting with a real estate attorney is highly recommended to ensure the clause adequately protects your interests.