Navigating the Financing Contingency

When “Show me the money!” meets “Not so fast!” in buying a home.

On the winding road from purchase offer to contract ratification to settlement, there are a few speedbumps that both buyers and sellers must navigate together. Contingencies are one type of speedbump, additional agreements that the contract will continue to move forward as long as certain conditions are met.

Sonia Downard, Title Attorney with Vesta Settlements, recently spoke to our agents about guiding clients through the Financing Contingency for sales in Virginia and avoiding missteps along the way. She explained that while the financing contingency can benefit both the buyer and seller in a sale, it is decidedly buyer-friendly with several protections.

In a real estate transaction, the Financing Contingency is the clause that gives buyers time to secure the financing for the purchase of a property – usually through a mortgage with a lending institution – within a specific time period. If a buyer is unable to secure financing, they can void the contract using this contingency and avoid legal penalties or losing their EMD (earnest money deposit.)

The most common types of financing are Conventional (the most popular), VA (for veteran and military buyers), FHA (great for first-time homebuyers and those with limited cash for down payments and fees), and USDA (for properties in rural areas).

Financing contingencies can have an automatic extension or an automatic termination, and a buyer can satisfy or remove the contingency by delivering to the seller a written commitment from the lender for the required financing. If a buyer misses the financing contingency deadline and has an automatic extension, the seller can deliver a written notice to the buyer that they have three days to remove the contingency or void the contract. However, it’s more likely that the seller will allow a contingency to remain in place up until settlement as lenders complete their final underwriting tasks.

If the buyer does not void the contract or deliver the written commitment from the lender, the contract stays in place without the protection of a financing contingency. On the other hand, if the buyer receives a written rejection letter from the lender for their specified financing and delivers it to the seller within the contingency time frame or within the three days of a seller requesting lender commitment, the contract becomes void. For contingencies with an automatic termination, the contingency expires on the specified date and the contract continues in full force and effect without the financing contingency protection.

An Appraisal Contingency plays a part in the financing contingency because the appraisal report is used to determine the value of the loan collateral, and if the property does not appraise for the contracted sales price the buyer could be denied financing. If the appraised value meets the contracted sales price or if the buyer elects to make up any difference between the appraised value and the contracted sales price, the appraisal contingency is removed. But if the property does not appraise, is not approved for specified funding (ex: denying a VA loan to be used to buy acreage), or has inadequate collateral (ex: an illegal living unit on the property that affects zoning requirements), the buyer can deliver notice to the seller to void the contract, along with a letter from the lender denying financing.

Some buyers skip including an appraisal contingency to make their offer more competitive, relying solely on the financing contingency for protection. But Downard reminds buyers to remember that the appraisal contingency relates to the value of the property and not the purchaser’s qualifications for the loan itself, and to keep in mind that the protections offered are different between the two types of contingencies. Note that VA, FHA, and USDA loans – as federally-backed loans – cannot waive an appraisal, and these specific buyers have the right to void a contract if the property does not appraise, bypassing any further negotiations with the seller. In this case, the seller cannot “save” the deal by lowering the sales price to the appraised value as they could have with a conventional loan buyer.

Lender-required repairs can also come up with financing contingencies – most often with VA and FHA loans – requiring the buyer to give the seller notice from the lender about needed fixes, and the two parties can negotiate how to complete the repairs and who will pay. Sellers have five days to give notice to buyers if they will make the lender-required repairs, and if the seller does not agree then the buyer has an additional five days to agree to make the fixes or void the contract.

Understanding the details of a contract and having the insight and experience to help people move through the different stages of homeownership is why Realtors® provide so much value to their clients. Connect with one of our McEnearney Associates | Middleburg Real Estate | Atoka Properties Associates and be confident you will be guided by the best!