Real Estate Contracts
What Is a Financing Contingency?
A financing contingency (also called a mortgage contingency or loan contingency) makes the purchase contract contingent on the buyer obtaining a mortgage with specified terms by a specified deadline. If the buyer cannot secure financing, they can exit the contract and recover their earnest money.
This contingency is one of the most important protections in a real estate contract and a common topic on licensing exams.
Financing Contingency Basics
What It Covers
The contingency specifies loan type (conventional, FHA, VA), loan amount, maximum interest rate, and a deadline. If the buyer cannot obtain a loan commitment matching these terms by the deadline, they can terminate and receive their earnest money back.
The Commitment Letter
A mortgage commitment letter from a lender confirms the buyer is approved for the loan. Receiving this letter typically satisfies the financing contingency. Pre-approval and pre-qualification are NOT the same — only a full underwritten commitment satisfies the contingency.
Waiving the Contingency
All-cash buyers and some competitive-market buyers waive financing contingencies to strengthen offers. Without this contingency, if the buyer's financing falls through, they lose their earnest money. This is a significant financial risk.
Appraisal vs. Financing
A financing contingency and an appraisal contingency are separate clauses. An appraisal contingency specifically protects the buyer if the property appraises below the purchase price. The financing contingency covers inability to obtain a loan, regardless of appraisal.
Exam Key Points: Financing Contingency
Financing contingency protects earnest money if the buyer cannot obtain specified loan terms
Must specify loan type, amount, rate, and deadline to be enforceable
Pre-approval is NOT the same as a loan commitment — contingency requires full underwriting
Without this contingency, buyer loses earnest money if financing falls through
Sellers can set a deadline after which they can give notice to the buyer to waive or terminate
All-cash buyers do not need a financing contingency
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