The Financing Contingency in the WB-11 Residential Offer to Purchase represents the tug of war between the buyer who does not want to be committed to buying the property unless he knows he can get the money to buy the property, and the seller who wants to know with absolute certainty as soon as possible that the buyer will have the purchase price funds at the closing table. The following questions about the financing contingency are frequently asked of the Legal Hotline.
Loan commitment not defined
The buyer delivered a loan commitment to the seller that is subject to final underwriting approval. The financing looks shaky. Can the seller declare the offer null and void, or did delivery of the commitment letter conditioned upon final underwriting satisfy the financing contingency?
Because the term “loan commitment” is not defined nor described as a “firm” commitment in the WB-11 Residential Offer to Purchase, a loan commitment that contains conditions or contingencies arguably satisfies the financing contingency. Additionally, lines 165-166 indicate that, “if Buyer qualifies for . . . financing acceptable to Buyer, Buyer agrees to deliver to Seller a copy of the written loan commitment.” Consequently, if the buyer delivers any loan commitment to the seller, even a loan commitment containing contingencies, the buyer has determined that the financing described in that loan commitment is acceptable and, thus, has satisfied the financing contingency. The buyer, therefore, should understand that by delivering this loan commitment to the seller, the buyer may become legally obligated to purchase the property even if the lender does not make good on the loan.
If the seller requires the loan commitment to meet certain minimal standards (not subject to sale, not subject to appraisal, etc.), the seller may specify these conditions when the offer is negotiated.
Notice of unacceptability
The buyer’s lender has issued a loan commitment that is at a higher interest rate and for less money than the offer states, and is conditioned upon the buyer paying off $36,000 in tax liens. The buyer signed a notice stating that financing is not available on the terms stated in the offer to purchase. Should the buyer attach the notice to the loan commitment from the lender?
Lines 167-170 of the WB-11 residential offer provide, “Buyer’s delivery of a copy of any written loan commitment to Seller (even if subject to conditions) shall satisfy the Buyer’s financing contingency unless accompanied by a notice of unacceptability. CAUTION: NEITHER BUYER, LENDER OR AGENTS OF BUYER OR SELLER SHOULD DELIVER A LOAN COMMITMENT TO SELLER WITHOUT BUYER’S PRIOR APPROVAL OR UNLESS ACCOMPANIED BY A NOTICE OF UNACCEPTABILITY.”
If the buyer is dissatisfied with the loan commitment, it may be submitted to the seller along with a notice of unacceptability to help demonstrate to the seller that the financing specified in the contingency is not available.
Conditions in loan commitment are not incorporated into offer
The co-broke agent submitted a loan commitment with the offer to purchase. The listing agent reminded her that, per the offer, the financing contingency is satisfied once a written loan commitment is submitted, even if it is subject to conditions. The co-broke agent got very angry and said that the conditions in the commitment are the buyer’s way out. Is he correct?
The submission of the loan commitment to the seller, in spite of any conditions stated therein, satisfies the financing contingency per lines 164-170 of the WB-11. If there are no other unsatisfied contingencies in the offer, the offer will be “firm,” and the buyer will be obligated to go through with the purchase.
The conditions of the loan commitment do not become conditions of the offer — they are not incorporated into the offer. If the conditions in the loan commitment cannot be met, the buyer would have to work that out with the lender. If the buyer cannot close because of financing, the seller would have a legal claim against the buyer for breach of contract.
Seller termination rights
The loan commitment was due last Friday, but no commitment has been sent by the buyer. At this point, is the financing contingency removed and does the sale continue? Or is this a dead offer?
Lines 171-172 of the WB-11 Residential Offer to Purchase provide, “SELLER TERMINATION RIGHTS: If Buyer does not make timely delivery of said commitment, Seller may terminate this Offer if Seller delivers a written notice of termination to Buyer prior to Seller’s actual receipt of a copy of Buyer’s written loan commitment.” The buyer essentially has a grace period and can still submit a loan commitment that will be considered timely as long as the seller does not first deliver a notice of termination to the buyer. Therefore, the financing contingency is not removed and the offer is still alive.
Pre-qualification versus pre-approval
What is the difference between a pre-qualification letter and a pre-approval letter?
A pre-qualification is an unverified, free test run of the loan application process. The lender uses the person’s income, monthly debts, credit history and asset information as well as electronic credit reporting to verify the person’s credit worthiness and estimate what the person can afford for a mortgage payment.
A pre-approval is a firmer commitment by the lender based upon a complete application with a fee, credit check and employment verification. A pre-approval letter says that a mortgage loan is approved for a certain amount of money (or for a certain property) for a certain amount of time, subject to appraisal of the property. If a pre-approval is required, the offer should clearly state what is needed and in what form. Because a pre-approval letter might be mistaken for a loan commitment waiving the financing contingency, a lender ideally should specify in the pre-approval letter that it is not a loan commitment.
Pre-approval doesn’t modify offer
The seller accepted an offer for $626,000 with a financing contingency that calls for a 30-year fixed 8-percent conventional loan in the amount of $500,000. The offer also required the buyer to provide a pre-approval letter to the seller within two days of acceptance. Now the loan commitment is due and the buyer submitted a rejection letter from a lender. The loan terms the buyer applied for were not those described in the offer. Does the language in the financing contingency supersede the financing terms stated in the pre-approval? Can the buyer change the contract terms by applying for a loan with terms different than those outlined in the financing contingency?
The buyer cannot unilaterally change the terms and conditions of the offer and the financing contingency based upon the terms of a pre-approval or a rejection letter. The terms stated in any pre-approval letter do not amend the offer. If the buyer applied for financing on terms that did not correspond to the loan terms stated in the financing contingency, the seller may take the position that the buyer has not proceeded in good faith and with due diligence in carrying out the terms and conditions of the offer (see lines 228-229 of the WB-11), and thus is in breach of the contract. Alternately, the seller may choose to finance on the terms and conditions stated in the offer (per lines 173-179 of the WB-11), or the seller may conclude that the financing contingency has failed and send the buyer a Cancellation Agreement and Mutual Release.
The bank is requiring a pre-qualification letter for an REO property or it will not consider the buyer’s offer. Can the bank require this?
Yes, it appears that the bank is making a lawful request of the buyer to provide a pre-qualification letter within two business days of the submission of the buyer’s offer to purchase. The bank is not imposing any charge for obtaining this letter and the buyer is free to use any lender. The bank appears to be attempting to avoid working with buyers who are not financially qualified for the transaction.
Wisconsin licensees have been working with the Financing Contingency in the current WB-11 for many years. Should the Department of Regulation and Licensing modify this provision as it revises the residential offer to purchase, or does it work fine the way it is?
Please email Debbi Conrad at dconrad@wra.org with your thoughts.
Debbi Conrad is Director of Legal Affairs for the WRA.
Editor's note: The DRL became the DSPS in 2011. Information above may not be current.