The Financing Contingency contained in the state-approved offer to purchase forms provides that if the buyer qualifies for the financing described in the offer, or any other financing acceptable to the buyer, the buyer agrees to deliver a copy of the written loan commitment to the seller by the stated deadline. 

When the Financing Contingency was first crafted, the seller expected that they would receive confirmation that the buyers successfully obtained their loan, which in turn meant that the purchase money would be at the closing table. This enabled the seller to have some certainty; they could schedule the movers with confidence and make other arrangements without worry. This comfort may have been a bit misplaced since sometimes the delivered loan commitment contained conditions. Some were standard administrative conditions but increasingly the commitment was conditioned upon the appraised value of the property being equal to or more than the purchase price or upon the sale of the buyer’s present property.

Today it seems that what is tendered as a loan commitment frequently is a long list of terms and conditions that may not be satisfied before closing. The comfort the seller used to find in receiving the buyer’s loan commitment may no longer be a reality. Loan commitments may come late in the transaction — well past the deadline. What looks workable on paper may not pass the underwriter’s final scrutiny. At closing, the seller is disappointed — or enraged — to find that the lender will not provide the loan, will lend a lesser amount, or will fund the transaction but not until after a significant delay.

In today’s uncertain mortgage market with the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) standards and the Ability-to-Repay rule just around the corner, it is important to talk to lenders about what is realistically available. Tightening underwriting standards and longer lists of conditions in commitments, much to the consternation of both buyers and sellers, seem to be the order of the day. REALTORS® would be wise to set the parties’ expectations with a good dose of pragmatism and make the parties aware of the benefits and limitations of the Financing Contingency. 

What is a loan commitment? 

“Loan commitment” is not defined in the offer. There is no standard loan commitment form as each lending institution communicates a “commitment” in its own format and with differing requirements and conditions. As such, it may be difficult to assert that any document issued by a lender that says it is a loan commitment and agrees to provide a loan to the buyer is not in fact a loan commitment. All loan commitments have conditions or contingencies of some sort, ranging from a condition that insurance binders be produced at closing, to a contingency that the buyer’s divorce judgment be finalized, to a requirement for an appraisal at least equal to the purchase price, to a contingency for the sale of the buyer’s current home. The CAUTION in the contingency confirms that: “The delivered loan commitment may contain conditions Buyer must yet satisfy.”

Thus, the seller has no stated authority to reject a buyer’s commitment because it is conditional. Any party wishing to define “loan commitment” may do so in the Additional Provisions section or in an addendum to the offer, but should be cautioned against setting the bar too unrealistically high. 

If the buyer receives a commitment with an unreasonably long list of conditions, the buyer or buyer’s attorney may contact the lender to see if some conditions are already completed or can be easily addressed to shorten the list. Perhaps the lender can issue a revised commitment before it is delivered to the seller.

If the lender will not modify the commitment and the buyer is not willing to proceed with unreasonable or burdensome conditions, the buyer could apply to another lender if there is time. Otherwise the buyer may need to submit the commitment with a notice of unacceptability that explains why the loan conditions are unrealistic and unacceptable.

To better prepare buyers and provide more reassurance to sellers, insist that buyers be preapproved or at least prequalified for a loan on the property. Having the buyer meet with a lender early is useful because then they can identify and address any personal hurdles before an offer is written.

Set maximum deadlines

Putting in 30 days will likely not be sufficient. The new federal standards are bound to slow the process down considerably. One strategy is to peg the deadline just before or at closing. If the offer also includes an Appraisal Contingency, consider setting the deadline for the Appraisal Contingency after the deadline for the Financing Contingency because the appraisal is often the last thing a lender orders.

Buyer may submit a commitment for the described loan or another satisfactory loan

While it is important that the loan terms in the Financing Contingency be filled out to avoid any claims of contract invalidity based on ambiguity or “subject to satisfaction,” the buyer may submit a loan commitment for a loan on terms other than those described in the contingency. Delivery of this commitment to the seller will satisfy the Financing Contingency.

When it comes to whether the buyer has satisfied the Financing Contingency, the key is not the loan commitment terms but rather the fact that a loan commitment has been delivered.

Delivering a loan commitment firms up the contract and obligates the buyer to close unless other avenues are available for bowing out of the transaction!

Buyer’s written delivery instructions are needed!

The Financing Contingency in the approved offers states: “Buyer and Seller agree that delivery of a copy of any written loan commitment to Seller (even if subject to conditions) shall satisfy Buyer’s financing contingency if, after review of the loan commitment, Buyer has directed, in writing, delivery of the loan commitment. Buyer’s written direction shall accompany the loan commitment.” The buyer may authorize delivery of the loan commitment in a WB-41 Notice, a cover letter or an email; by writing delivery instructions on the commitment; or another means that documents the buyer’s approval and instructions.

If delivery instructions do not accompany the loan commitment, the buyer has breached the parties’ agreement. Hence, delivery of a loan commitment without a copy of the delivery directions is as if the delivery did not occur and does not satisfy the contingency.

Seller termination and buyer’s grace period

If the buyer has not delivered a loan commitment by the stated deadline, the seller may terminate the offer by delivering a written notice of termination to the buyer prior to actually receiving the buyer’s loan commitment. If the buyer missed the deadline and the seller does not terminate the offer, the buyer may still deliver a loan commitment to satisfy the contingency. The loan commitment will be considered timely as long as the seller does not first deliver notice of termination to the buyer. The Financing Contingency is not removed and the offer is not automatically terminated simply because the buyer is outside the loan commitment time frame.

If the buyer cannot get a loan 

The buyer may provide lender rejection letter(s) or other evidence of financing unavailability if the offer does not dictate a specific lender or loan program. That will trigger the seller’s decision whether to self-finance the transaction. This does not, however, require the buyer to use a third-party lender named by the seller. If the buyer does not apply to more than one lender, the seller also may consider a claim that the buyers did not act in good faith and with due diligence, depending on the circumstances. For instance, is the described loan realistically available from more than one lender, or does the buyer have an obstacle that’s blocking his ability to obtain the described loan regardless of the lender? If the seller believes that the buyer has not made a good faith effort to obtain financing, the seller may request the earnest money per the default provisions of the offer. 

What can the buyer do if the loan does not come through? 

The buyer may attempt to find other financing. The inclusion of an Appraisal Contingency will give the buyer a “way out” if the property does not appraise at or above the purchase price; the buyer may deliver a copy of the appraisal report and a notice terminating the offer to the seller, or negotiate to modify the purchase price. The seller could sue the buyer for breach of contract if a loan commitment was delivered and the buyer cannot pay the purchase price at closing.

What can the seller do if the money does not come through? 

If there is no amendment to extend the closing, have the buyer pay additional earnest money or take other actions, the seller may want to sit down with his or her attorney to see what legal remedies are available, desirable and practical.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.