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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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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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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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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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:
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.
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.
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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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.
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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. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.
A real estate lawyer in NYC just told me that contracts are typically written where the appraisal doesn’t need to come in at the contract price, but instead usually the bank just has to agree to lend a certain loan amount or LTV. Is that right? I thought contracts were all customized and I know it’s all negotiable?