What’s a Financing Contingency, and Should I Waive It?

A financing contingency is a written term in the Purchase Offer & Sale Contract for the sale of a home. The financing contingency gives buyers the right to walk away from the deal if, for any reason, they are unable to secure financing for the balance of the purchase price by the Closing deadline. This contingency often seems very attractive to buyers - after all, it eliminates the risk of any liability to the buyer if a he can’t secure a loan (or can’t secure the right loan) for his purchase. Conversely, Sellers don’t like the idea of signing up for sales with the possibility that the buyer can walk away without penalty if he can’t secure financing. Moreover, the financing contingency can be abused: if a buyer has “buyer’s remorse” after having an offer accepted, if he has a financing contingency, he might claim that he couldn’t secure financing, when in reality he simply refused to provide potential lenders with information and documents necessary to secure a loan. As a result, Sellers are often more comfortable accepting offers from buyers who have waived the financing contingency.

In today’s Bay Area market, most buyers get comfortable that they can - and should - waive the financing contingency when submitting offers. Here’s why: today, mortgage lenders do the bulk of the work to evaluate buyer’s creditworthiness before buyers submit offers on homes. This is evident in the pre-approval process: prospective buyers submit exhaustive personal and financial information to lenders in order to allow lenders to evaluate their creditworthiness and issue a pre-approval letter. The process can often take time, but the result is a robust pre-approval letter that should give buyers a high degree of confidence that financing is available to them on the terms and conditions set by a bank or other lender, all before the buyer submits her first bit. And in turn, when buyers are confident about their financing picture, they should feel more comfortable waiving a financing contingency in their written offer. Of course, a pre-approval letter doesn’t absolutely guarantee that a given loan will be available at closing, but in our experience, robust pre-approvals from reputable lenders can generally be relied upon with confidence.

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