What is a financing contingency when placing an offer on a house?

What is a financing contingency? What are the risks if I don’t include one in my offer? If the appraisal comes back lower than the purchase price, what happens? findwell agent Michael Schafer answers in this installment of Ask an Agent.

Q: What is a financing contingency and what are the risks if I don’t include one in my offer?

A: The finance contingency is an addendum that you include in the contract that is for your protection as a buyer. It designates to the seller that you are getting a certain type of financing with a certain percentage down, and it protects you in the event that you are unable to get your loan approved at the end of the process. It also protects you if the appraisal comes in at a value that is lower than what is on the contract.

The finance contingency is something that you can entertain waiving. However, I’d only recommend doing so if you have spent a significant amount of time with your lender going over all of your documentation and you and your real estate agent and the lender are all on the same page with your qualifications in terms of getting the loan approved.

You do still have a risk of not only potentially losing your employment prior to closing the contract, but also the appraisal coming in at less than the contract price. For that reason, it is highly important that the real estate agent is involved in determining the value of the property and making sure that you all feel comfortable that it will appraise at the end of the process.

Q: If the appraisal comes back lower than the purchase price, what happens?

A: If an appraisal comes in at less than the contract price, assuming that you have a finance contingency in place, there are a number of scenarios that can play out which are designated in that financing contingency. One is which is where the seller can lower the price to match the appraised value. The buyer can also come up with the extra cash to make up the difference, or a combination of those two things can happen. The other option is that the contract will terminate and the earnest money is refunded to the buyer and the seller moves on to putting their home back on the market.