How Does the Financing Contingency Work in a Property Sale Contract?

Home sales are usually financed in part by lenders, such as banks and mortgage companies. For this reason, contracts for the purchase of homes require deposits at the time of signing, but are generally contingent on the buyer obtaining financing for the purchase.

The Florida Realtors/Florida Bar Residential Contract for Sale and Purchase (the “FAR/BAR Contract”), which is widely used in home sales, was recently updated. The revised version includes significant changes to the financial contingency section, Section 8. This provision has been a source of confusion, causing many Florida home buyers to lose their deposits unnecessarily.

If you are the buyer, the loan approval and notification process can be tricky. Section 8 of the FAR/BAR Contract requires you to:

• Apply for the type of financing specified in the contract within five days after the effective date of the agreement, unless a different number of days is agreed upon.
• Use good faith and diligent efforts to obtain the financing by the approval deadline, which is 30 days after the effective date of the contract, unless the document specifies a different deadline.
• Notify the seller in writing if the loan is approved by the approval deadline. If the loan approval is contingent on the buyer selling other property, the contract must specify that contingency as well. If the loan approval requires a valuation of the property satisfactory to the lender, it isn’t a loan approval until the buyer obtains that valuation.

You might also be required to keep the seller and brokers up to date on each step of the process, if you are requested to do so in writing.

If you don’t receive a loan approval, you may notify the seller, by no later than the loan approval deadline, that you have chosen to do one of the following:

• Cancel the contract, in which case the seller must return the deposit.
• Intend to go forward with the deal, presumably because you expect the loan will be approved, but you will not receive your deposit back if you subsequently back out of the transaction.

If you don’t notify the seller of either option by the loan approval deadline, the seller has three days to cancel the contract and return your deposit. Otherwise, the financing contingency expires, causing you to lose your deposit if you cannot complete the transaction.

Many Florida buyers don’t realize that they must cancel the contract in writing before the loan approval period expires to ensure return of the deposit. The best way to protect yourself and ensure that you meet all the requirements for a successful home purchase is to hire an experienced real estate attorney. You can call Norma Echarte & Associates at 305-501-2844 or contact us online for astute advice and representation throughout your home purchase. Our office is in Miami.