The Financing Contingency Trap for Unwary Buyers

ORLANDO, Fla. – What’s one of the more troubling contract issues we hear on the Florida Realtors Legal Hotline? Buyers who lose their deposit because they didn’t understand how the protection described in the financing contingency works.

Please note that different contracts can have very different rules, so this is not a discussion of general contract law. Instead, we’re looking specifically at the financing contingency contained in Section 8 of the Florida Realtors/Florida Bar Residential Contract for Sale and Purchase, which is the same in the “AS IS” version. This is version 6, released November 1, 2021.

Please note that the recent contract revision contains some significant changes to the financing contingency section, so it may be worth reviewing even if you feel confident about the contents of this section.

Buyer’s path to protection

1. Apply for financing within ____ days after the effective date (5 days if left blank). See Section 8(b)(i). Please note that this application must be the specific type of financing described in 8(b), which describes details about the loan term, interest rate, fixed vs. adjustable rate, and conventional/FHA/VA/other.
2. Use good faith and diligent effort to obtain loan approval. See Section 8(b)(i). There are some specific examples of what this would look like, such as paying for an appraisal, paying fees, or timely providing all documents and information required by the mortgage broker and lender.
3. If asked in writing, keep the seller and real estate licensees on either side of the transaction fully informed about pretty much anything going on with the loan application. See Section 8(b)(ii).
4. Notify the seller in writing if they receive loan approval before the loan approval deadline. See Section 8(b)(iii).
5. Know when a loan approval isn’t actually considered loan approval.

1. If a loan approval requires the buyer to sell other real property, then it “shall not be considered Loan Approval unless Rider V is attached.” See Section 8(b)(i)
2. If a lender provided a loan approval but hasn’t received an appraisal or alternative valuation satisfactory to the lender (if required), then it doesn’t meet the contract’s definition of Loan Approval. The contract now requires both of these things to occur before the end of the loan approval period: lender provided a loan approval and lender obtained a satisfactory appraisal. See Section 8(b)(i).

6. If the buyer does NOT receive loan approval by the loan approval deadline (30 days if left blank), they have two main options, with a third option if buyer neglects to choose option 1 or 2.

1. Option 1: Cancel the contract by sending a written message to the seller before the loan approval deadline expires. Assuming everything is in order, the buyer should be entitled to get the deposit back. See Section 8(b)(iv). This option is at the heart of the financing contingency. It’s designed to be the buyer’s safe exit from the contract if things don’t come together as hoped by the deadline the buyer and seller negotiated.
2. Option 2: If the buyer is satisfied their financial needs will work out and wants to go forward despite not having loan approval, they can send a written message to the seller stating that they’re moving forward with the contract. Note: The deposit would likely be at risk now if something falls through with the loan. See Section 8(b)(iii)
3. Option 3: If the buyer neglects to put either option 1 or option 2 in writing, the contract converts to a cash deal. Like option 2, the deposit would likely be at risk if something falls through with the loan. See section 8(b)(v). Note: If the buyer neglects to put anything in writing, the seller will have a 3-day window after the loan approval period expires when they can cancel the contract and refund the deposit to the buyer by sending their own written message to the buyer.

Some of you may be wondering why this article is titled “The Financing Contingency Trap for Unwary Buyers.” It’s because we often hear about buyers who inadvertently went with Option 3, because they didn’t understand that there was a decision to make before the loan approval period expired. These buyers often deliver a loan denial (typically just before closing) and expect to get their deposit back. They simply didn’t understand that the contract forces a decision if they don’t have loan approval (and appraisal) completed before the loan approval deadline, and that putting neither notice in writing (option 1 or 2) converts the contract to a cash transaction with no financing contingency.

There are certainly more moving parts to this section, but these are the highlights from a buyer’s perspective. Please note that buyers are always welcome to have their own attorneys keep track of deadlines, advise on the best course of action, and even send written notice on the buyer’s behalf. This would be an extremely wise investment for any buyers who have a significant amount of deposit at risk, or for those who just want peace of mind. That said, buyers are always welcome to handle their own legal matters, if they prefer.

Joel Maxson is Associate General Counsel for Florida Realtors

Note: Advice deemed accurate on date of publication

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