What Happens If Financing Falls Through on a House?
Navigate the complexities when home financing unexpectedly falls through. Get clear insights into the process and your options.
Purchasing a home involves multiple stages and legal agreements. While many transactions close smoothly, a common challenge is when a buyer’s financing unexpectedly falls through. This situation creates uncertainty for all parties, requiring a clear understanding of the implications and next steps.
Understanding the Financing Contingency
A financing contingency, also known as a mortgage contingency, is a clause in a real estate purchase agreement. It protects the buyer by making the home sale conditional on securing mortgage financing within a specified timeframe. This provision allows a buyer to withdraw from the purchase agreement without penalty, including forfeiture of their earnest money deposit, if they cannot obtain the required loan.
This contingency outlines key elements. It establishes a deadline, often 30 to 60 days from the contract’s effective date, for the buyer to obtain loan approval. During this period, the buyer must make a “good faith effort” to secure financing, which includes promptly applying for a mortgage, providing all requested financial documentation, and responding to inquiries. Common documents required are tax returns, pay stubs, and credit reports.
The clause specifies loan terms like the loan amount, type (e.g., conventional, FHA, VA), and sometimes a maximum interest rate. If loan approval deviates significantly from these terms, or if the property’s appraisal is lower than the agreed price, the contingency may allow contract termination. It also dictates a formal notification process, requiring the buyer to inform the seller in writing if financing cannot be secured by the deadline. This written notice is crucial for invoking the contingency and protecting the buyer’s earnest money.
Buyer’s Next Steps After Financing Failure
When home financing falls through, the buyer must act promptly and adhere to the financing contingency terms. The first step is to formally notify the seller in writing that the financing condition has not been met. This notice must be delivered before the contingency period expires. Providing a loan denial letter from the lender is often required, serving as proof that financing could not be secured despite good faith efforts.
Adhering to contractual deadlines for this notification is crucial. If the buyer fails to provide timely written notice, they risk being in breach of contract. This could result in forfeiture of their earnest money, as contingency protection would no longer apply. Buyers should maintain records of all communications with their lender and seller, including dates and copies of documents.
If the issue arises close to the deadline, the buyer might request an extension of the contingency period from the seller. While a seller is not obligated to grant an extension, it can provide time to explore alternative financing or resolve minor issues. If no extension is granted or a resolution isn’t found, the buyer’s primary action is formal contract termination based on the unmet financing contingency to safeguard their deposit.
Seller’s Recourse and Options
When notified that a buyer’s financing has fallen through, the seller faces options. The first step is to review the contract, especially the financing contingency clause, to confirm the buyer adhered to all notification requirements and deadlines. This ensures the termination is valid and the seller’s rights, especially regarding earnest money, are preserved.
If the financing contingency was properly invoked, the seller’s primary recourse is to accept termination. This allows the seller to re-list the property. While frustrating due to lost time and carrying costs, this is standard for transactions with financing contingencies. The seller should also ensure they receive a signed mutual release from the buyer to terminate the contract and clarify earnest money disposition.
If the financing issue is minor or the seller is motivated to sell quickly, they might consider negotiating alternative terms. This could involve extending the contingency, adjusting the price, or exploring seller financing. However, the seller is not obligated to pursue these alternatives; terminating the contract and seeking a new buyer is often the most straightforward path. Backup offers can mitigate the impact of a financing failure.
Disposition of Earnest Money
The fate of the earnest money deposit is a key concern when a home purchase contract terminates due to failed financing. Earnest money, typically 1% to 5% of the sale price, is a good faith deposit held in an escrow account, demonstrating the buyer’s serious intent to purchase. Its disposition depends on whether the financing contingency was properly invoked and all contractual obligations were met.
If the buyer, having made a good faith effort, is unable to secure financing within the specified contingency period and provides timely notification, the earnest money is typically returned. This refund protects the buyer from penalty for an outcome beyond their control. Earnest money is usually returned if the buyer doesn’t qualify for the loan, or if the property appraises for less than the agreed price, leading the lender to decline the loan.
Conversely, earnest money may be forfeited to the seller if the buyer fails to meet contractual obligations. This occurs if the buyer doesn’t apply for financing diligently, misses the notification deadline, or backs out for reasons not covered by the contingency. To release funds from escrow, both buyer and seller must sign a mutual release agreement, authorizing disbursement. Without this agreement, funds may remain in escrow, potentially leading to disputes requiring mediation or legal intervention.