Financing contingency: Overview, definition, and example
What is a financing contingency?
A financing contingency is a clause in a contract that makes the agreement dependent on the buyer's ability to secure financing for the purchase. In real estate transactions, for example, this contingency allows the buyer to back out of the deal without penalty if they are unable to obtain a loan or other financing necessary to complete the purchase. This contingency is often included in purchase agreements to protect the buyer from financial risk.
For example, a buyer might enter into a contract to purchase a home, but the purchase is contingent on their ability to secure a mortgage loan. If the buyer cannot secure financing by a certain date, they can cancel the agreement and have their deposit refunded.
Why is a financing contingency important?
A financing contingency is important because it provides a safeguard for the buyer, ensuring that they are not legally bound to proceed with a purchase they cannot afford. It helps prevent situations where a buyer enters into a contract with good intentions but later finds that they cannot secure the necessary funding.
For sellers, the financing contingency allows them to be aware that the sale could fall through if the buyer fails to secure financing. It can also be an important factor when negotiating the terms of a sale, as sellers may prefer to deal with buyers who do not have such contingencies, to minimize the risk of the deal falling through.
Understanding financing contingency through an example
Imagine a buyer agrees to purchase a house for $300,000. The purchase agreement includes a financing contingency, stating that the buyer must secure a mortgage loan for the property within 30 days. If the buyer is unable to get the loan, they can cancel the agreement and receive their earnest money deposit back.
In another scenario, a buyer might be looking to purchase commercial property and includes a financing contingency in their agreement. If the buyer cannot secure the necessary business loan or financing, they can back out of the contract without facing legal consequences or losing any deposits.
An example of a financing contingency clause
Here’s how a financing contingency clause might look in a contract:
“This Agreement is contingent upon Buyer obtaining financing in the form of a loan for the purchase of the property. Buyer must secure a loan for no less than $[amount] on or before [date]. If Buyer fails to obtain financing by this date, Buyer may terminate this Agreement and receive a refund of any earnest money deposit.”
Conclusion
A financing contingency is a vital protection for buyers, especially in high-cost purchases like real estate. It ensures that the buyer is not locked into a deal they cannot afford, providing the flexibility to walk away if financing falls through. For sellers, it highlights the importance of ensuring a buyer’s financial ability before committing to a sale. Both parties benefit from understanding and negotiating the terms of a financing contingency, as it can help avoid disputes and ensure the transaction proceeds smoothly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.