What Is a Finance Contingency and How Does It Work?

A finance contingency, often called a mortgage or loan contingency, is a standard clause in real estate purchase agreements. This contractual provision states that a home sale is dependent on the buyer successfully securing a mortgage or other necessary financing. Its fundamental purpose is to provide a safeguard for the buyer’s earnest money deposit. This means if a buyer is unable to obtain the required financing, they can withdraw from the contract without losing the significant funds they committed upfront.

Key Elements of a Finance Contingency

A finance contingency clause includes specific terms and conditions that define the scope of the buyer’s financing requirements. The type of loan is often specified, such as a conventional mortgage, a Federal Housing Administration (FHA) loan, or a Department of Veterans Affairs (VA) loan. The clause also commonly sets a maximum acceptable interest rate; if loan terms exceed this rate, the buyer may not be obligated to proceed.

The contingency outlines the required loan-to-value (LTV) ratio or the minimum down payment percentage. This determines the portion of the purchase price that needs to be financed versus the buyer’s upfront contribution. For instance, a common LTV might be 80%, implying a 20% down payment. The financing deadline is the date by which the buyer must obtain a loan commitment. If the property’s appraisal comes in lower than the agreed-upon purchase price, this can also impact the loan amount the lender is willing to provide, potentially affecting the buyer’s ability to meet the contingency terms.

The Contingency Process

The finance contingency process begins after a purchase offer containing this clause is accepted by the seller. The buyer must submit a formal mortgage application to a lender. This involves providing extensive financial documentation, such as pay stubs, tax returns, and bank statements. The lender then reviews the buyer’s financial profile and the property.

The lender will order a property appraisal and a title search. While a pre-approval provides an initial estimate of borrowing capacity, the goal during the contingency period is to secure a full loan commitment, which is a firm offer of financing from the lender, subject to final conditions. The buyer is responsible for providing all requested information and meeting the specified deadlines. This timeline ranges from 30 to 60 days.

Outcomes of a Finance Contingency

Once the finance contingency period concludes, several outcomes are possible. If the buyer successfully secures a loan commitment that aligns with contract terms, the contingency is satisfied. This means the transaction can proceed towards closing, and the buyer’s earnest money deposit remains protected and will be applied towards the down payment or closing costs.

If the buyer is unable to obtain financing despite good faith efforts to meet the contingency’s terms, they can withdraw from the contract without penalty. The finance contingency allows for the return of the earnest money deposit. The buyer provides written notification to the seller, often accompanied by documentation from the lender confirming the inability to secure financing. Buyers also have the option to waive the finance contingency, which can make their offer more appealing to sellers. However, waiving this protection means the buyer risks losing their earnest money if financing falls through, as they would be obligated to complete the purchase regardless of loan approval.