A properly structured Financing Contingency benefits both buyer and seller...

Because there are multiple components and "moving parts" to contract Financing Contingencies, it's sometimes a challenge to put one together that allows buyer flexibility and compliance along with seller assurance and comfort.

A couple weeks ago, I did an overview and introduction to Financing Contingencies. Today we go into further detail and make some suggestions for filling in the blanks and keeping everyone happy.

A real estate contract Financing Contingency usually includes -

- Time limit to make loan application

- Interest rate and length of loan in years

- "Good faith and diligent effort" by the buyer

- Time limit to produce loan commitment, denial, or waiver

- Requirements for exercising the FC and terminating contract

If you haven't yet read the first discussion, or would like to review it before getting started today, click the following link :

Financing Contingency Intro 8-11-2015

Financing Contingencies can be satisfied by the date agreed to in the contract in 3 ways:

- Produce a Mortgage Commitment from the lender

- Show a lender's loan denial letter

- Waive the contingency

Buyers waive by agreeing to continue with the terms of the contract without the contingency.

Waiving before having a real financing commitment from a lender can be dangerous for buyers. If financing falls through after waiving, all deposits may be lost. See the intro piece for a discussion on what's in a Mortgage Commitment.

Before waiving, buyers should know the loan will be approved and funded, or that they have the ability to pay cash for the property without financing.

It's very important for buyers and their Realtors� to know

how the contract says the FC can be exercised or waived.

Some contingencies are active, meaning buyers must either produce a Mortgage Commitment, denial letter, or give the seller a written waiver and proceed with the deal.

If none of these occurs by the FC date, the seller has the right to terminate the contract and keep any deposits after proper notification to the buyer.

Other contract contingencies are passive, which means that if the buyer does not produce a Mortgage Commitment or denial letter by the specified date, the contingency is considered automatically waived without written notice between parties.

(Attorneys recommend that ALL communication regarding the contract be done in writing, including notice of automatic expirations.)

In this case, the buyer is then committed to the contract as written without the waiver. If he/she can get loan approval and funding by the closing date, great. If not, all deposits can be

forfeited to the seller if the buyer doesn't follow through with the purchase.

The buyer's Loan Originator must also be aware of the dates

and type of notification required by a Financing Contingency.

Let's briefly discuss a few other important parts of Financing Contingencies -

Time limit to apply for financing

Most contracts default to 5 or 10 days through wording like "...if blank, then 5 days". Whichever is appropriate to your deal, fill in the blank with the number of days, don't resort to the blank default. Be sure everyone knows the timeframe involved.

Having buyers provide a dated acknowledgement from their

Mortgage Originator that they have started the application process is the best way to let all parties know.

Interest rate and length of loan

Even with PreApproved buyers, full loan application and submission to Underwriting still have to be made, so a specific interest rate for that buyer, on that property, and at that time is impossible to determine when a contract is submitted.

It's OK to put 30 years for the loan term because that is the most popular and allows a wide range of choices.

The same thinking goes for the type of loan program (conventional or FHA). If I were a Realtor� filling in a Financing Contingency, I'd probably check both boxes, opening up the buyer's options even further.

When dealing with rates, if you put in too high a maximum interest rate, your buyer could be exposed to increasing rate spikes.

If you put in too low a rate, market rates could be higher when the rate is ready to be locked after full buyer application and disclosures.

These are ways buyers have been known to use poorly written FCs as an escape clause by saying available rates are now too high or not what was specified in the contract.

Whether or not a buyer is already PreApproved, a good way to handle the rate entry that is usually agreeable to both seller and buyer is to use "buyer's qualifying rate" or "prevailing available rates".

It is not possible to know all the rate variables

that early in the transaction.

Buyers will either qualify for financing or not on a certain

property at a certain price. Don't limit their choices or ability to qualify with FC terms that are too specific.

"Good faith and diligent effort" by the buyer

This may be the most difficult part of a Financing Contingency to either support or disprove. What constitutes "diligent effort", and how can it be verified?

Once sellers know that buyers have made application, it is completely reasonable to ask for weekly updates on the progress of that application. Buyers who are really putting effort into providing everything the lender needs are usually quite happy to give progress reports to their Realtors�, who can then let sellers' agents know.

Hold Mortgage Originators accountable for sending weekly progress reports. They cannot reveal confidential information, though they can tell you how things are progressing.

Time limit for commitment, denial, or waiver

As we have discussed before, an achievable timeline for most conventional (non-government insured) financed transactions with a motivated buyer and seller is:

30 days for Financing Contingencies,

39 days for closing

Remember that the contract uses calendar days, yet lenders and title companies get things done on business days. There are only 22 business days in a 30-day calendar month.

That wraps up our 2-part discussion on Financing Contingencies. Due to perspective and interpretation, buyers and sellers often have different points of view on them.

When we have a purchase contract, the basic assumption is that the buyer wants to buy, and the seller wants to sell. It's our job to put a deal together that allows both to do what they want as easily as possible.

When buyers have contract legal questions, have them consult a licensed Attorney. Only Attorneys may offer legal advice.

And when you have questions about filling in the terms of a Financing Contingency, call me for best practices from the lender's perspective. I'll do my best to help you, your buyers, and your sellers arrive at the closing table well-informed and relaxed.

Let me reinforce the trust

your buyer has placed in you! sm