In general terms, a real estate financing contingency clause establishes a particular action or condition that is necessary for a contract to be binding. Within a real estate contract, a contingency enters the paperwork when both the buyer and seller agree that it should be among the terms and then sign the contract. It is crucial that you understand what is involved with contingency clauses if you are going to include one in your contract. The purpose of this article is to outline how contingency clauses work and then focus on the mortgage financing contingency clause.

Real Estate Financing Contingency Clause

Real estate transactions generally open when a buyer makes an offer to the owner of a home to buy the residence. The offer generally consists of a price and may request things like a carpet allowance or other rider. The seller might accept the offer outright, or he might counter that offer, at which point a series of negotiations ensues, leading either to a purchase or to an impasse. If the parties do not agree, the offer is void, and neither party is obligated to the other. If the seller accepts the offer, the buyer will put down earnest money, a deposit showing the good faith of the buyer to complete the transaction. A lot of the time, this deposit is 1 percent of the purchase price, which goes into escrow and will stay there until the purchase is completed. If the purchase goes through, the earnest money goes toward the purchase price. If something happens to the deal, though, the buyer forfeits the earnest money in most cases.

Some real estate contracts include contingency clauses. These give the parties the option to abandon the deal under circumstances that they have agreed to. Some of these include time frames for inspection, securing financing or completing repairs. All contingency clauses must be written clearly so that both the buyer and the seller are aware of the consequences and implications.

If the terms of the contingency clause go unmet, the contract becomes invalid, and one of the parties can leave the deal without facing any consequences. If the contingency clause is met, the contract becomes enforceable from a legal standpoint, and for either party to back out of it would constitute a breach. The consequences of a breach differ from loss of the earnest money to litigation. If the buyer decides to back out and the seller can’t find anyone else to buy the house, the seller has the right to file a suit for “specific performance,” requiring the original buyer to complete the purchase.

A mortgage financing contingency clause allows time for the buyer to secure financing to pay for the property purchase. This is crucial protection that the buyer needs, because if this is in place, the buyer can abandon the contract without losing the earnest money if he or she cannot get funding from the bank, or some other lending source. A mortgage financing contingency clause states the length of time in which the buyer has to find financing. Before that date, the buyer can either terminate the deal or ask for more time from the seller, who would have to agree in writing. If the buyer does not terminate or find financing before the contingency period comes to an end, the contingency is waived, and the buyer is on the hook for the purchase.

Understanding the different financing options that are available is crucial when dealing with this sort of contingency clause. A lot of people buy homes each year without having bank approval. Because banks are still so ironclad with regard to credit scores and income history, there are people with the means to purchase a home but cannot get the banks to deal with them. In situations like that, there are private lenders and brokerages that can help people find the financing that they need. The interest rates might be somewhat higher, but you are still in the house you want, and given the short-term nature of mortgage loans in Canada, it won’t be that long before it is time to refinance as it is. If you have this sort of clause in your contract and are concerned about your ability to gain bank financing, talk to Amansad Financial about finding other forms of financing that might get the deal done.