Understanding a Financing Contingency

Today we’re going to talk briefly about the financing contigency that is in your real estate contracts and, more specifically, the circumstances under which the buyer can get their money back if the financing falls through.

Some of you who have been practicing in the real estate industry for a while remember back in the day, if a buyer’s financing failed at any point all the way up to the day of closing, if they didn’t get it for whatever reason, they would get their money back. Unfortunately, this mean that many, many sellers would have no idea if their deal was solid until they got to the closing table and it caused a lot of problems in the industry. 

Due to this, the FARBAR contract was changed and changed in a way that is still confusing to some realtors. We still get lots and lots of questions about what happens when the financing fails at the time of closing and that’s the reason we’re talking about this today!

If you take a look at the loan approval section, that financing section, of your contract, you’re going to find that the buyer has thirty days to obtain what the contract calls ‘loan approval’. If at any time during that 30 day period the buyer can’t get the loan approval letter, they can cancel the contract and get their money back. However, if they don’t cancel the contract and even if they don’t get a loan approval letter, if they continue on and do not cancel it will be treated as if they did get the approval. The reason that matters is because now they are extremely limited in the instances in which they can get their money back.

What we frequently see happen is a borrower will make an application and maybe they won’t get loan approval within 30 days but they’re feeling confident enough that they want to take a chance on the transaction. So, they move forward, and the appraisal comes in. An appraisal is one of the few reasons that a contract can be cancelled after that thirty day period that still allows the buyer to get their money back. 

However, there is a little wrinkle here. If the type of financing that the buyer was trying to get and identified in the contract is changed mid-contract, such as going FHA instead of conventional, and the financing then fails because of the appraisal, they are NOT entitled to their money back. A lot of people don’t realize how important that loan identification is. 

Ultimately, once the loan approval period expires, regardless of whether or not the buyer submits proof of loan approval, they buyer’s deposit is at risk. 

We understand that the ins and outs of this process can be very confusing so if you have any questions at all about the financing contingency or anything else about your transaction, please feel free to give us a call. We would be happy to help you in any way we can! Our number is: 352-241-8629.