Financing Contingency

What is the Financing Contingency?

The financing contingency gives the buyer time to secure a loan in an agreed-upon period (generally 30 to 60 days.) Otherwise, if the buyer is unable to secure financing but can prove that they made a good faith effort to receive it (as defined by certain requirements,) they can walk away from the deal with their earnest money.

Why does the Financing Contingency matter?

The financing contingency is important because even if the buyer has been pre-approved, the loan is not guaranteed. After pre-approval, the loan must go through underwriting and final approval, during which problems can occasionally arise. Therefore, the buyer can include a financing contingency in their offer to protect their earnest money. 

However, asking for this clause may put their offer at a disadvantage compared to other offers, especially during a Seller’s Market. In a competitive market, sellers may be inclined to choose offers without (or with fewer) contingencies to increase the likelihood of the sale closing.

How can a buyer ensure their financing goes through?

As a financed buyer, you can improve your financing will go through by:

  • Researching to find the best fit lender. Some lenders may reject your loan application, whereas others may be happy to work with you. This may could depend on whether you’re working with a major bank vs. a smaller financial institution. 
  • Applying for a reasonable loan based on factors such as your credit score, income, and debt-to-income (DTI) ratio.
  • Receiving a loan pre-approval before putting down an offer, to know you’re initially qualified.
  • Providing a creditworthy cosigner or collateral if, for instance, you have no credit or a high DTI.
  • Not making any substantial changes to your financial standing, including buying a new car or opening a new credit line.
  • Improving your credit by paying down debts. If your credit utilization is high or you have delinquent debts, they’re likely impacting your credit score. So, if you can pay those down, it can significantly raise your credit and chances of receiving a loan.

What is a Good Faith Effort to secure financing when using a Financing Contingency? 

The definition of a good faith effort to secure financing depends on the state in which the sale is happening. However, it generally stipulates that the buyer submitted a loan application and cooperated with the lender to provide all requested documentation necessary to approve the loan. Some states also specify that the loan amount must not be greater than what is needed to finance the home or that the loan application was submitted in a specific time frame.