Financing Contingency: FAQs

ORLANDO, Fla. – Following all of the moving parts of a financing contingency can be confusing. Let’s take a closer look at the contingency found in the Florida Realtors®/Florida Bar contracts.

This is the third and final installment  covering the Florida Realtors/Florida Bar financing contingency. The first article provides an overview of the contingency and shows how the rights and obligations of the parties shift as the contract progresses down different paths. The second article reviewed terms that are defined in a specific way for the contract.

This article will cover a few frequently asked questions on the Florida Realtors Legal Hotline.

Topic: Loan approval includes satisfactory appraisal

Question: Is there an appraisal contingency built into the financing contingency?

Answer: Not exactly. A typical appraisal contingency can be added to the contract using Addendum F Appraisal Contingency, which allows the buyer to get an appraisal up until a negotiated deadline. If the appraisal is lower than the amount specified in the addendum, the buyer has the option to cancel the contract penalty free. Or, if the buyer is satisfied with the low appraisal, then the buyer can move forward to closing despite the low appraisal.

The appraisal portion of the financing contingency hinges on the lenders’s satisfaction with the appraisal, if one is requires. The contract states it is contingent upon the “Buyer's mortgage broker or lender having received an appraisal or alternative valuation of the Property satisfactory to lender, if either is required by lender, which is sufficient to meet the terms required for lender to provide Financing for Buyer and proceed to Closing (‘Appraisal’).”

Note the loan approval deadline is critical to this analysis. If the loan approval deadline is looming, here are a few scenarios and what they mean to the buyer:

Appraisal portion of the financing contingency is satisfied

• The lender or mortgage broker obtains a satisfactory appraisal.
• The lender or mortgage broker decide no appraisal is required.
• The lender or mortgage broker obtain a low appraisal but think it’s good enough to still issue the loan.

Appraisal portion of the financing contingency is not satisfied (buyer can cancel)

• The lender or mortgage broker say the appraisal amount isn’t sufficient for them to approve the loan.
• The lender or mortgage broker don’t yet have an appraisal or alternative valuation and the loan approval deadline happens soon.

Topic: VA/FHA rider and appraisal

Question: Is the appraisal contingency answer different from what you just described if the buyer is seeking an FHA or VA loan and the FHA/VA rider is attached to the contract?

Answer: Yes. Both the FHA and VA sections of the rider include a clause that overrides anything else in the contract. The rider provides the buyer won’t be obligated to complete the purchase and should not incur any penalty (i.e. will be able to keep the deposit) if the appraised value doesn’t meet a specified amount.

Topic: Proof of loan denial

Question: Does the contract obligate the buyer to provide a copy of a loan denial when they notify the seller they are terminating the contract due to not obtaining loan approval?

Answer: No. The contract simply provides: “If Buyer is unable to obtain Loan Approval within the Loan Approval Period...Buyer may terminate this Contract by delivering written notice of termination to Seller prior to expiration of the Loan Approval Period.”

That said, if a seller demands proof the loan hasn’t been approved, it may be in the buyer’s best interest to provide documentation. The alternative – proving it in court -- can be a costly and time-consuming process.

Topic: Giving written notice

Question: If a buyer doesn’t have loan approval and wants to terminate before the loan approval period expires, the contract provides the buyer can terminate by giving written notice. What counts as written notice, and who can give the notice?

Answer: Section 18, Standard O states all notices “...may only be made by mail, facsimile transmission, personal delivery or email.” The following people are allowed to send this notice: the buyer, the buyer’s attorney or the buyer’s real estate broker or associate. Other options may be available if there’s a power of attorney court-appointed guardian who can make decisions on the buyer’s behalf.

Topic: Failing to give written notice

Question: What if the buyer simply calls the seller to inform them of the loan approval. Will that work to give notice?

Answer: No. “If Buyer fails to timely deliver any written notice... prior to expiration of the Loan Approval Period, then Buyer shall proceed forward with this Contract as though Paragraph 8(a), above, had been checked as of the Effective Date.” Paragraph 8(a) provides that “This is a cash transaction with no financing contingency.” Any time a buyer fails to provide one of the described written notices, the contract reverts to a cash transaction based on the failure to send the notice in writing.

Topic: Extending the closing date vs. extending the loan approval deadline

Question: If the parties extend the closing date, does that mean the loan approval deadline is also extended?

Answer: No. These are separate deadlines. What if the buyer just calls the seller to let them know they have the loan approval. Will that work to give notice?If parties are extending one deadline under a contract, ensure there aren’t additional deadlines that must be extended or the extension doesn’t conflict with an existing deadline.

Topic: Buyer seeks a different loan

Question: If Section 8(b) of the financing contingency provides the contract is contingent on the buyer obtaining a conventional loan, but the buyer decides to pursue a FHA loan instead, is the buyer still protected by the financing contingency?

Answer: Probably not. The “Financing” is specifically defined as a conventional loan  As such, the financing contingency states, “Buyer shall make application for Financing within  __ days after Effective Date and use good faith and diligent effort to obtain approval of a loan meeting the Financing and Appraisal terms...” If the buyer pursues a loan product that differs from the specifically defined Financing, it will not be covered under Section 8.

Joel Maxson is Associate General Counsel

Note: Information deemed accurate on date of publication

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