Buyer Beware the Financing Contingency in Real Estate Closings

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When purchasing real property, many prospective clients and real estate agents use the Far/Bar "As-Is" form contract approved by the Florida Association of Realtors and the Florida Bar.  I write to alert my clients of the potential problem with the financing contingency clause.

Let's assume that the buyer is seeking to acquire a house for a purchase price of $550,000 and will be taking out a loan for 80% of the purchase price, which means that the buyer will be paying at least 20% of the purchase price or $110,000 in cash in order to close the transaction. The real estate contract will naturally have a clause that the closing is subject to the buyer obtaining financing for the loan. However, the problem is that the current Far/Bar real estate contract fails to adequately address the financing issue for several reasons.

Specifically, the "contingent financing" clause in the Far/Bar Contract states that the closing is conditioned upon the buyer obtaining a Loan Commitment within a certain period of time. Therefore, if the buyer does not obtain a Loan Commitment within the period of time specified in the contract, then the buyer is relieved of his or her obligation to purchase the property and then receives a complete reimbursement of any good faith deposit that the buyer paid into escrow. However, the contract fails to adequately address the issue of what happens if the buyer obtains the Loan Commitment, but for some reason cannot close on the purchase.

Continuing with the example, let's say that the parties sign the contract and provide for a closing to occur within 45 day, with the Loan Commitment to be obtained within 30 days. Let's further assume that the buyer makes a good faith deposit of $20,000 and obtains a Loan Commitment within the 30-day period indicated by the contract. Under the terms of the Far/Bar "As-Is" contract, upon obtaining the Loan Commitment, the financing condition is met and the buyer is deemed to have waived the financing contingency, which means that if for some reason the buyer does not close on the purchase, then the buyer will lose the good faith deposit.

Now, let's assume that prior to the closing, the bank informs the buyer that the bank's underwriting department requires that the buyer have at least 6 months of reserves in order  to finalize the loan, which means that the buyer must have the equivalent of 6 months of monthly payments in the bank. If the buyer does not have any more money and cannot come up with the reserves required by the bank, then the buyer may not be able to obtain the loan to purchase the property and would lose his or her good faith deposit because the buyer has already waived the financing contingency according to the contract.

The specific problem here is that the standard Far/Bar "As-Is" contract provides that the financing contingency is waived upon receiving a loan commitment or soon thereafter. Therefore, what the contract needs to provide is that the purchase of the property should be subject to the buyer actually obtaining the loan from the bank, including meeting underwriting approval and all other requirements of the bank. In the example above, what the contract needs to state is that "the contract, and the buyer's obligation to close the transaction, shall be contingent upon the buyer actually obtaining a loan from the lender."  With this change, the problem would have been resolved.

If you have any questions regarding real estate law or commercial transactions, please contact me, Santiago J. Padilla, Esq., at (305) 824-2400, or via email.

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