The Financing Contingency Explained

The financing contingency is often misunderstood when it comes to NYC real estate deals. The financing contingency is actually a rather broad term for a contract contingency that can include many negotiable parts, such as an appraisal contingency or minimum loan amount contingency. It’s important to also understand that while a financing contingency is often asked for during the offer negotiation stage, it is fleshed out in more detail during the contract review stage between the lawyers.

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What Is the Financing Contingency?

The financing contingency is a contract contingency that allows a home buyer a certain amount of time post contract execution to secure a loan commitment letter. If the buyer makes a bona fide effort yet still fails to secure a financing commitment from a lender, the buyer is allowed to cancel the contract and walk away with their earnest money check.

Because the financing contingency is a contract contingency, it only takes effect after a listing is in contract. This means that the financing contingency offers protections to the buyer after a purchase contract has been fully executed. Essentially, a financing contingency provides the buyer with a way out of the contract in case he or she is not able to secure a financing commitment letter, within a specified period of time (typically 30 to 45 days after contract execution).

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What Is a Financing Contingency Clause?

The financing contingency clause is a section of the purchase contract which spells out the terms of the financing contingency, including important details such as how many days the buyer has after contract execution to secure a mortgage commitment letter.

It’s important to understand that the financing contingency clause can be negotiated by both the buyer’s and seller’s attorneys prior to signing, even though the financing contingency clause is typically part of the more standard purchase contract vs the more custom contract riders.

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Is a No Financing Contingency Offer Better?

A no financing contingency offer is certainly more attractive for sellers, but is less advantageous for buyers. Having no loan contingency means a greater certainty of close in the eyes of the seller, which equates a non-contingent offer utilizing financing to that of an all cash offer. Of course, all cash offers are still the best because they are faster to close due to not having to wait around for a bank to fund a loan.

However, no loan contingency isn’t so great for a buyer that actually needs a loan to be able to close. If the buyer doesn’t have backup funds to cover the entire purchase plus NYC closing costs in case he or she doesn’t get funded, then he or she risks having to default on the contract and losing his or her contract deposit!

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What Are the Standard Offer Contingencies in NYC?

The most common and really only “standard” offer contingency in NYC is the financing contingency. This financing contingency is typically requested within the offer email that the buyer’s agent sends to the listing agent.

See below for a typical offer email in NYC that specifies a financing contingency:

Dear [Listing Agent Name],

We are pleased to submit the following all cash offer of $[Price] for [Address] on behalf of our client [Client Name]. Our client intends on putting 20% down, and this offer is contingent on financing.

We have an attorney on standby ready to review a contract ASAP, and we’ve also included a REBNY Financial Statement and a short biography for your review. If necessary, we can also provide proof of funds in the form of brokerage and bank statements. Please confirm receipt and let us know if we can do a deal.

Thank you!

Please note that this financing contingency at this stage is a rather broad term that can be refined and further negotiated by the attorneys. For example, the buyer’s attorney may negotiate minimum loan amount language that allows the buyer to cancel the contract if the buyer can’t secure financing for at least a certain amount.

What is the financing contingency in NYC real estate? What does a financing contingency clause look like? Financing and funding contingencies, explained.

The buyer’s attorney can also negotiate an appraisal contingency, which essentially allows the buyer to cancel the contract if the appraisal done by the bank comes in lower than a certain price (usually the contract price).

Pro Tip: Other offer contingencies such as a sale or Hubbard contingency are rarer. Inspection contingencies are not used in the NYC market because inspections are typically done prior to contract signing. As a result, it can be a sneaky buyer tactic to re-negotiate after inspection but before signing the contract.

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Is the Financing Contingency Also a Funding Contingency?

No. A funding contingency allows a buyer to cancel a contract if he or she is unable to obtain funding or financing to complete the purchase. A funding contingency essentially protects a buyer if the bank pulls its lending commitment before closing. For example, a loan commitment letter will have a number of contingencies and conditions that must be satisfied prior and up to closing.

For example, the lender will usually call the HR department of the borrower’s company to verify employment status a couple of days before closing. If the borrower has lost his or her job in the interim, then this will be a condition that will cause the lender to renege on their lending commitment. A funding contingency can protect against this so called “funding gap” risk.

Because of the greater execution risk, funding contingencies are extremely rare to see in the NYC real estate market. Sellers will rarely agree to it, though a savvy buyer can certainly ask their attorney to try and negotiate some sort of language into the contract. Even if the seller doesn’t agree to a full funding contingency, he or she might agree to a partial funding contingency where the buyer is liable for a smaller amount of damages vs the entire contract deposit.

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Financing Contingency Clause Example

See below for a sample financing contingency clause from a standard New York purchase contract, which has been edited to make it more readable. For example, we’ve replaced references to certain sections of the contract with “the above provisions” or other similar language.

Purchaser, directly or through a mortgage broker registered pursuant to Article 12-D of the Banking Law, shall diligently and in good faith:

Apply only to an Institutional Lender for a loan on the Financing Terms on the form required by the Institutional Lender containing truthful and complete information, and submit such application together with such documents as the Institutional Lender requires, and pay the applicable fees and charges of the Institutional Lender, all of which shall be performed within 5 business days after the Delivery Date;

Promptly submit to the Institutional Lender such further references, data and documents requested by the Institutional Lender; and

Accept a Loan Commitment Letter meeting the Financing Terms and comply with all requirements of such Loan Commitment Letter (or any other loan commitment letter accepted by Purchaser) and of the Institutional Lender in order to close the loan; and

Furnish Seller with a copy of the Loan Commitment Letter promptly after Purchaser’s receipt thereof.

Purchaser is not required to apply to more than one Institutional Lender.

If the Purchaser has complied with all applicable provisions, Purchaser may cancel this Contract as set forth below, if

Any Institutional Lender denies Purchaser’s application in writing prior to the Loan Commitment Date; or

A Loan Commitment Letter is not issued by the Institutional Lender on or before the Loan Commitment Date; or

Any requirement of the Loan Commitment Letter other than one concerning Purchaser is not met (e.g. failure of the Corporation to execute and deliver the Institutional Lender’s recognition agreement or other document, financial condition of the Corporation, owner occupancy quota, etc.); or

(i) The Closing is adjourned by the Seller or the Corporation for more than 30 days from the Scheduled Closing Date and (ii) the Loan Commitment Letter expires on a date more than 30 business days after the Scheduled Closing Date and before the new date set for Closing pursuant to this paragraph and (iii) Purchaser is unable in good faith to obtain from the Institutional Lender an extension of the Loan Commitment Letter or a new Loan Commitment Letter on the Financing Terms without paying additional fees to the Institutional Lender, unless Seller agrees, by Notice to Purchaser within 5 business days after receipt of Purchaser’s Notice of cancellation on such ground, that Seller will pay such additional fees and Seller pays such fees when due. Purchaser may not object to an adjournment by Seller for up to 30 business days solely because the Loan Commitment Letter would expire before such adjourned Closing date.

Purchaser shall deliver Notice of cancellation to Seller within 5 business days after the Loan Commitment Date if cancellation is pursuant to the above clauses and on or prior to the Scheduled Closing Date if cancellation is pursuant to the above clauses.

If cancellation is pursuant to the above clause, then Purchaser shall deliver to Seller, together with Purchaser’s Notice, a copy of the Institutional Lender’s written denial of Purchaser’s loan application. If cancellation is pursuant to the above clause, then Purchaser shall deliver to Seller together with Purchaser’s Notice evidence that a requirement of the Institutional Lender was not met

Seller may cancel this Contract by Notice to Purchaser, sent within 5 days after the Loan Commitment Date, if Purchaser shall not have sent by then either (i) Purchaser’s Notice of cancellation or (ii) a copy of the Loan Commitment Letter to Seller, which cancellation shall become effective if Purchaser does not deliver a copy of such Loan Commitment Letter to Seller within 10 business days after the Loan Commitment Date.

Failure by either Purchaser or Seller to deliver Notice of cancellation as required by the above provisions shall constitute a waiver of the right to cancel.

If this Contract is canceled by Purchaser pursuant to the above section, then thereafter neither Party shall have any further rights against, or obligations or liabilities to, the other by reason of this Contract, except that the Contract Deposit shall be promptly refunded to Purchaser and except as set forth in the above sections. If this Contract is cancelled by Purchaser, the Seller shall reimburse Purchaser for any non-refundable financing and inspection expenses and other sums reimbursable pursuant to the above sections.

Purchaser cannot cancel this Contract pursuant to the above sections and cannot obtain a refund of the Contract Deposit if the Institutional Lender fails to fund the loan (i) because a requirement of the Loan Commitment Letter concerning Purchaser is not met (e.g., Purchaser’s financial condition or employment status suffers an adverse change; Purchaser fails to satisfy a condition relating to the sale of an existing residence, etc.) or (ii) due to the expiration of a Loan Commitment Letter issued with an expiration date that is more than 30 business days after Scheduled Closing Date.

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Disclosure: Hauseit and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. The services marketed on Hauseit.com are provided by licensed real estate brokers and other third party professional service providers. Hauseit LLC is not a licensed real estate broker nor a member of any multiple listing service (MLS).

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