When buying a home, one of the most important steps is securing financing. A contract contingent on financing is a common clause in the purchase agreement that protects the buyer in case they are unable to obtain financing for the home.
What does “contingent on financing” mean?
A contract contingent on financing means that the sale of the home is dependent on the buyer securing financing. Essentially, the buyer and seller agree to the sale, but the sale will only go through if the buyer can get approved for a mortgage.
Why is a contingency clause important?
Financing contingency clauses are important because they protect the buyer from losing their earnest money deposit if they are unable to obtain financing for the home. Without this clause, the buyer would be in a situation where they would have to come up with the cash to buy the house or risk losing their deposit.
The contingency clause also protects the seller from a buyer who is unable to get financing and prevents the transaction from falling through once the purchase agreement has been signed.
How does it work?
The contingency clause will typically state that the buyer has a certain amount of time to secure financing. If the buyer is unable to obtain financing within that timeframe, they can back out of the deal without any penalties.
If the buyer does secure financing, the contingency clause is removed, and the sale can proceed as planned.
What are the risks?
There are some risks associated with a financing contingency clause, primarily for the seller. If the buyer is unable to secure financing, the seller will have to put the home back on the market, which can be time-consuming and costly.
Additionally, if the buyer is unable to obtain financing within the specified timeframe, the seller will be left without a buyer, which can be frustrating.
Overall, a contract contingent on financing is a crucial protection for both the buyer and the seller in a real estate transaction. It allows the buyer to have peace of mind knowing they won`t lose their deposit if they can`t get financing while also protecting the seller from a sale falling through at the last minute.