What Is A Financing Contingency? Everything Brevard County Sellers Need To Know

Dated: May 2 2022

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What Is A Financing Contingency? Everything Brevard County Sellers Need To Know

At Realty World Curri Properties, we have seen just about every type of contingency that buyers and sellers can write into a contract. Financing contingencies are extremely common in real estate contracts. In fact, the standard FAR-BAR (Florida Bar (BAR) and Florida Association of Realtors (FAR)) "AS-IS" residential contract stipulates that a buyer must obtain financing within a certain number of days. So how does this affect sellers? This blog post explains everything Brevard County sellers need to know about financing contingencies when selling their home. 

What Is a Financing Contingency?

A contingency clause can be a useful addition to a real estate contract, as it provides a way for the buyer or seller to back out of a deal if certain conditions are not met. 

A financing contingency, sometimes known as a "loan contingency," – is a clause that allows buyers to cancel a home purchase with no penalties if they're unable to secure a mortgage within the agreed timeframe — this includes a full refund of their earnest money. 

How Does A Financing Contingency Affect Sellers?

Contingencies are all about mitigating risk. Buyers who are financing part of their purchase benefit from a financing contingency, as it protects them in the event that they cannot receive loan approval. Of course, this means that the seller risks accepting an offer that depends on the buyer's ability to obtain financing. In this instance, if the buyer's loan is not approved, the seller must put their property back on the market and find a new buyer. 

It's for this reason that sellers must understand and agree to the proposed financing timeline set forward by the buyer in their offer. Sellers should also consider whether the proposed dates are realistic—this helps to avoid wasted time off of the market for financing that's unlikely to get approved. It's also important to note that FAR-BAR contracts are calculated using calendar days, which means that weekends are included.

If you're unsure how a financing contingency might affect you, ask your real estate agent to provide a timeline of the contractual deadlines and what can happen if they're not met. 

What Happens If A Buyer Defaults On The Financing Contingency?

Although a financing contingency typically protects buyers, a buyer can still default and put their earnest money deposit at risk. For example, if they fail to make a timely loan application, do not comply with their lender's requests, or do not take the necessary steps to obtain a timely lending decision.

A buyer may also put their escrow at risk if they intentionally make decisions that negatively impact their loan decision, such as quitting their job or taking on large debts. In these cases, a seller may have the right to keep the buyer's escrow or sue for additional damages. In this instance, it's crucial that sellers discuss their options with their real estate agent and seek legal advice from a real estate attorney. 

How Can Sellers Limit Their Risk With A Financing Contingency?

The only certain way sellers can avoid a financing contingency is only to accept cash offers. Cash offers are not dependent on approval from a lender, so they do not require a financing contingency. 

However, if a seller does receive a partially financed offer, there are ways to limit their risk. Before accepting an offer, sellers should review the potential buyer's financing terms. For example, what percentage of their offer is financed? Does the buyer have an up-to-date pre-approval letter from their lender that matches the terms of their offer? As a general rule-of-thumb, higher loan-to-sales price ratios carry more risk of being denied.

Working with an experienced real estate agent is one of the best ways to avoid unnecessary risks when selling your home. Knowledgeable real estate agents understand how to vet potential buyers effectively to ensure the sales process runs as smoothly as possible. 

If you're thinking about selling your Brevard County home and would like to know its current market value, click here

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