Financing Contingency

A financing contingency, also known as a mortgage contingency, states that the buyer must get approved for a loan before being able to complete the purchase of a home. This contingency is an important form of protection for the buyer; in the event that the buyer cannot secure financing, she can back out of the home purchase and reclaim her earnest money.

When the buyer and seller reach mutual acceptance, the buyer has a specific amount of time during which he must secure a loan commitment letter from a lender. If, after a good-faith effort, the buyer cannot secure a loan in that time, the deal is canceled and the buyer can back out the deal without losing his earnest money.

For all-cash buyers, waiving the financing contingency may make sense; there's no need to finance the home purchase with a mortgage, and waiving the financing contingency means that the seller has one less buyer "escape route" to worry about. But for those of us who depend on a mortgage to purchase a home, it's almost always a bad idea.

Though some buyers consider waiting their financing contingency in order to make their offer more attractive, this is an extremely risky decision. In the event that your financing falls through, you would still be contractually obligated to purchase the home. Though you may still be able to avoid buying the home, you would almost certainly lose your earnest money, and may very well find yourself on the business end of a lawsuit.