It's The Law: Financing contingency can be tricky

Question: I want to buy a condominium, but need mortgage financing. I do not want to risk my deposit. My realtor tells me we can use a contract with a financing contingency. Will that protect me?

Answer: A financing contingency is probably the most common contingency in a residential real estate purchase contract. It is intended to protect the buyer, by making the purchase contingent on buyer obtaining financing. For clarity and to protect both buyer and seller, the financing contingency clause should include the following terms:

1. A statement that the buyer’s obligation to purchase is contingent on buyer obtaining financing.

2. Specification of the principal amount and, if important to the buyer, terms of the loan, i.e., interest rate, length of loan and even costs associated with the loan.

3. Deadline by which the buyer must obtain the loan or waive the contingency along with procedure for notifying the seller that the contingency is met, not met or waived.

4. Requirement that the buyer make a good faith diligent effort to obtain financing from a lender that makes loans of the type specified and possibly include a deadline for making loan application.

Most real estate purchases use pre-printed, standardized forms. Most of those forms have “check the box” provisions to include a financing contingency. Because they are pre-printed and in general use, many buyers are lulled into a false sense of security when their contract contains a pre-printed financing contingency clause. The exact wording and operation of financing contingency provisions vary significantly between contract forms and it is important for a buyer to fully understand a contingency before signing a purchase offer.

The two most common contract forms used in Collier County are a form which I helped prepare as part of a committee of attorneys and local Realtors working through the Naples Area Board of Realtors (“NABOR contract”) and a contract prepared by a joint committee of Florida Realtors and the Florida Bar (“Fla. Realtor contract”). The financing contingencies in those two contracts differ.

The Florida Realtor contract contingency requires the buyer apply for financing by a deadline and provide the seller with either a written mortgage commitment or approval letter or written notice that the buyer is unable to obtain a commitment by a later deadline (the deadlines can be changed by filling in blanks). The buyer is required to keep the seller informed of the loan application status. The Florida Realtor contract provides that the buyer apply for financing at prevailing interest rate and loan cost based on the buyer’s credit worthiness. If the buyer fails to obtain a loan commitment after diligent good faith effort and provides written notice to seller of failure prior to the deadline to obtain a commitment, either party may cancel the contract and the buyer’s deposit is refunded. If the buyer fails to notify the seller that a mortgage commitment has not been obtained and terminate the contract by the deadline for obtaining a loan commitment, the financing contingency is waived.

As with the Florida Realtor contract, the NABOR contract provides deadline for making loan application. The NABOR contract provides blanks to fill in interest rate and term. Because loan commitments are rarely true commitments (i.e., the lender reserves right to withdraw or require certain conditions be met in order to actually make the loan) the NABOR contingency does not require the buyer obtaining a loan commitment but sets a deadline for the buyer to waive the financing contingency. If not waived, the seller has the right to terminate the contract once the contingency deadline has passed. The buyer can terminate only if the buyer receives an Equal Credit Opportunity Act Statement of Adverse Credit Action letter from an institution confirming that the loan application was denied because the property was unacceptable or the buyer financially failed to qualify. Those letters are often difficult to get and many loans are not denied, but are just not approved and funded by time of closing. In those cases, the buyer is still protected under the NABOR contract as it allows the buyer to terminate the contract if the buyer has made a diligent good faith effort to obtain financing, but financing is not available as of the scheduled closing date.

Under Florida law, a buyer is only required to apply for financing at one bank, which makes loans of the type described in the contract. This is in contrast to the laws of many other states which require buyers to make multiple applications to show good faith diligent effort to obtain a loan.

Even when pre-printed forms are used, it is important to understand the terms of the forms before signing. Financing contingencies are intended to protect a purchaser, but will not do that job if the purchaser does not understand and agree to the contingency provisions. I recommend you review terms of any proposed contract with your attorney before signing.

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Questions for this column can be sent to William G. Morris, e-mail: wgmorrislaw@embarqmail.com or by fax, (239) 642-0722.

Other articles of interest can be viewed at our website, www.wgmorrislaw.com.

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