Financing Contingencies allow buyers time to arrange purchase financing after having an offer accepted.

I started writing this edition a couple of weeks ago and intended it to be a fairly

complete discussion. The further I got into it, the more it became clear that a 2-part series was needed to fully explore a topic with so many variables.

So - this week we''ll do a general overview and in the next week or two we'll continue with a more detailed approach on the different components of a Financing Contingency and some suggestions for filling in the blanks.

Buyers usually want them to be as specific as possible, while sellers want them as broad as possible -

A Financing Contingency is a clause in, or an addendum to, a real estate sales/purchase contract that says the buyer has a fixed period of time to secure financing.

If a financing commitment from a lender cannot be produced within that time, the buyer has the right to cancel the contract and have any deposits returned.

If the contingency date passes and the buyer cannot provide a mortgage commitment from a lender, the buyer can lose all deposits.

Yet, it's not really that straightforward.

Since buyers and sellers have different approaches to the deal, there can be misunderstanding about how a Financing Contingency relates to and influences the processing and approval timeline.

There's also usually a provision for the buyer waiving the FC, meaning that he/she agrees to continue with the terms of the contract without the contingency.

We'll go into more depth on waivers in the second part of our FC discussion.

Sellers are sometimes hesitant to accept contracts with Financing Contingencies because they feel taking the property off "active" listing status will reduce exposure to more potential buyers.

However, a properly PreApproved and motivated financing buyer poses about the same risk of not reaching the closing table as does a cash buyer.

It's true that some buyers have been known to use poorly written FCs as an "escape route" when buyer's remorse sets in after submitting a contract, leaving the seller to start all over again with another buyer and contract.

When you're the listing agent, you want to protect your

sellers from unnecessary delays and contract termination.

When you're the selling agent, you want buyers to have the

flexibility to address all the details involved, receive good financing terms, and arrive at the closing table on time.

Too short a time frame and too specific on terms makes

the seller happy, though can unreasonably limit a good buyer.

Too long a time and too broad on terms makes

the buyer happy, yet can make the seller uncomfortable.

The important parts of a Financing Contingency usually include:

- Time limit to make loan application

- Interest rate and length of loan in years

- "Good faith and diligent effort" on the part of buyer

- Time limit to produce loan commitment or invoke waiver

- Documentation and notice requirements for exercising

the FC and terminating contract

- Notice requirements for waiving the FC

When talking about Financing Contingencies, it's important to understand the difference between...

PreApproval - Loan Application - Mortgage Commitment

since they all have a direct bearing on FCs, yet are very different from each other.

A PreApproval is a preliminary estimate of mortgage affordability based on information a person has provided to the lender. It is neither an offer to lend, nor an agreement to borrow. By definition and function, they are prepared before buyers submit an offer on a specific property.

Because sellers and Realtors� depend on PreApprovals to determine buyers' preliminary ability to purchase, they should be based on a lender actually reviewing a borrower's current financial situation.

(Send an email for a PDF copy of my PreApproval Checklist)

A true PreApproval is always in writing and should include:

- Date prepared and name of lender

- Buyer/borrower name(s)

- Purchase price

- Down payment (amount or %) and term (30 years, etc)

- Occupancy (primary, second home, investment)

- Type of loan (conventional, FHA, VA, USDA)

- Loan or file identification number

- Name and contacts of person who prepared it

PreApprovals are not binding on either the lender or buyer,

and therefore cannot be used to satisfy FC requirements.

When there's an offer accepted and a purchase contract signed by both buyer and seller, it's time to turn the PreApproval into a full application.

In fact, until we have a contract and property address, we do not have a full loan application. Without an application, loan processing and property Appraisal cannot begin.

If buyers are not PreApproved, this is when they start submitting all the documents needed to qualify and support the application. Obviously, they're starting the process much later than if they have already provided their basic financial documents for a PreApproval.

Buyer information (income, assets, debts) in those application documents are evaluated and verified in the processing phase of the loan. Then followup, additional, and most current versions are requested. The Appraisal is ordered and the application is fully processed, getting it ready for submission to Underwriting.

At this point, we are still not far enough along to give any information that would satisfy a Financing Contingency.

See the Newsletter Archives for discussions on the qualifying process and other variables such as Appraisals, Insurance, Paperwork, and Buying Timeline.

Only after the full application is submitted to Underwriting and it looks good for final Approval, can a Mortgage Commitment be made by the lender. At Underwriting, buyer, property, and contract details are checked for compliance with specific loan program guidelines.

Even then, there are still conditions to be met before closing. It is almost impossible for a Mortgage Commitment not to have conditions.

With a Mortgage Commitment from the lender's Underwriting department, we can now satisfy the Financing Contingency.

A Mortgage Commitment is a document that includes:

- Lender and company address

- Loan file number and authorized signature

- Buyer/borrower(s) and property address

- Loan amount, interest rate, LTV, length of loan

- Date issued and expiration date

- Any conditions that must be met before closing/funding

- Signed acceptance by buyer/borrower

The conditions in a commitment may include such things as:

- Proof of homeowners insurance

- Most recent bank statement showing money for closing costs

- Financial statements from the property's HOA

- Pre-closing credit report showing no new debts

- Evidence of clear title and lenders title insurance

- Anything else to address qualifying details before closing

You can see all the steps and time it takes to accurately and safely address a Financing Contingency, which is why 30 days is both reasonable and realistic to allow buyers to address all the variables.

A good rule of thumb on contracts is -

30 days for Financing Contingencies,

37 days for closing

I like to see "on or before" any contract's FC or closing dates. It goes a long way toward raising seller comfort levels while giving buyers an extra push.

Note: the contract uses calendar days, yet lenders and

title companies get things accomplished on business days.

(There are 22 business days in a 30-day calendar month.)

That's our introduction to Financing Contingencies -

It's important for Realtors� to know the difference between PreApprovals, Applications, and Mortgage Commitments so they can let buyers and sellers know an expected timeline when using a Financing Contingency.

In the next week or two, we'll address each of the components and offer some suggestions on structuring a FC so that both buyers and sellers are comfortable with the contract.

When you have buyers who want to use financing, call me

when they first start looking at properties with you. Well-informed buyers and sellers make our jobs so much easier.

Let me reinforce the trust

your buyer has placed in you! sm