Uncovering the Truth: Financing Contingency Urban Legends

The Financing Contingency in the WB-11 Residential Offer to Purchase is always a hot topic at the WRA. Whether brought up in the context of continuing education, company training or the Legal Hotline, it is an issue that always provides a great deal of discussion.

 Cori Lamont  |    February 07, 2013

One of the longest contingencies in the Wisconsin-approved form at almost 46 lines, this contingency addresses many issues — from potential loan terms to default language that controls when the offer is not contingent on financing. Needless to say, it can be overwhelming at first glance. 

And while consumers and agents alike may initially feel they need a decoder ring to understand the contingency, it is far less confusing when stripped down to the basics. This article will break down the most common myths associated with the Financing Contingency. No decoder ring needed. 

Contrary to popular belief, the Financing Contingency benefits both parties in the transaction. The buyer is saying, “This is what I believe I can obtain, and if I can’t, I want to be able to walk away”; the seller is saying, “you must show that you tried to obtain the terms stated in the contingency if you are claiming you cannot get a loan.” However, line 236 provides the buyer with some flexibility to accept loan terms different than those in the offer. Line 236 clearly allows the buyer to move forward with a “loan acceptable to Buyer.” For example, the buyer may wish to purchase the property with a fixed rate of 5 percent while the offer was written to include a fixed rate of 4.25 percent. As long as the written loan commitment is properly delivered to the seller, the buyer may choose to proceed with terms different than those described in the offer. Of course, if the loan commitment provides the financing described in the Financing Contingency, the buyer cannot deem it unacceptable and give a notice of unacceptability.

All lines referenced throughout this article apply to the (2011) WB-11 Residential Offer to Purchase.

Urban legend #1 

A loan commitment does not have to be in writing.

The truth: The buyer is required to obtain a written loan commitment within the time frame indicated on line 219. 

Urban legend # 2

State law dictates the terms that make a document a loan commitment.

The truth: Since the term “loan commitment” is not defined in the offer or state law, one could argue that any lender-issued document stating agreement to provide a loan to the buyer is a loan commitment. Loan commitments generally have conditions or contingencies, ranging from a condition that insurance binders be produced at closing to contingencies for appraisals or the sale of a buyer’s home. Many times, the commitment is required to be delivered before the loan underwriting process and other lender procedures are complete, so there will naturally be unresolved conditions.

Delivery of the loan commitment satisfies the terms of the Financing Contingency, but additional steps may be needed if the buyer is actually going to get the funds. Generally a longer time frame to satisfy the Financing Contingency means fewer unresolved conditions and requirements in the buyer’s loan commitment.

There is no standard loan commitment form as each lending institution issues unique commitments subject to different exceptions. 

Urban legend #3

A buyer’s written direction for delivery of a loan commitment is not required.

The truth: The language at lines 235-246 ensures that a loan commitment is not forwarded to the seller or the listing agent, if the seller’s recipient for delivery, unless and until the buyer reviewed and approved the commitment and gave written instructions for delivery. Before this modification was made, when a loan commitment was forwarded to the seller, regardless whether the buyer had even seen the commitment terms, the buyer became bound to the contract, assuming no other unresolved contingencies. The buyer would potentially have to borrow money on terms and conditions that were unfavorable or beyond what the buyer could afford.

Delivery of the loan commitment waives the Financing Contingency, effectively making the transaction a cash deal. Thus, the fact that the buyer must provide written directions for delivery of the loan commitment to the seller is a measure of protection for the buyer to make sure that the buyer has an opportunity to review and approve the terms of the commitment. This provision does not create an obligation on the part of the lender; the lender’s role is to provide a written loan commitment for the buyer to see the loan’s terms and conditions, and the seller can receive written confirmation that the buyer is complying with the offer and has secured a loan. 

Lines 238-242 provide, “Buyer and Seller agree that delivery of a copy of any written loan commitment to Seller (even if subject to conditions) shall satisfy Buyer’s Financing Contingency if, after review of the loan commitment, Buyer has directed, in writing, delivery of the loan commitment. Buyer’s written direction shall accompany the loan commitment. Delivery shall not satisfy this contingency if accompanied by a notice of unacceptability.” 

Thus, the buyer must review the loan commitment and give written instructions for the delivery; that written directive must accompany the commitment when delivered to the seller. The buyer’s notice for direction of delivery could be 1) given as a WB-41 Notice Relating to Offer, 2) on the loan commitment itself if a lender included such language on the commitment, or 3) on a separate document or by e-mail. 

Urban legend #4

A loan commitment that includes ANY condition does not remove the Financing Contingency.

The truth: Again, once the buyer provides the loan commitment along with direction for delivery of the loan commitment, and the loan commitment is delivered to the seller, then the buyer has satisfied the contingency and effectively created a cash deal. This is true regardless of any conditions in the loan commitment and regardless of the number and type of any conditions. The offer is between the buyer and the seller, and the Financing Contingency of the WB-11 sets the terms of the agreement. If the buyer delivers the loan commitment to the seller, even if it is subject to conditions, the buyer has waived financing.

For example, if the buyer provides the seller a loan commitment that is subject to an appraisal and the property does not appraise out, the buyer is still obligated to buy the property. This is true even though the loan the buyer was counting on fell through. A seller in this situation could claim that the buyer breached the contract and sue for specific performance or damages.

The offer does not include the lender because the terms of the loan commitment are not incorporated into the offer. The offer in this situation did not include an appraisal contingency, but the loan was contingent on the appraisal.

If the buyer receives a commitment with an unreasonably long list of conditions, the buyer or buyer’s attorney may contact the lender to see if the list can be shortened. Perhaps some conditions would already be completed or could be addressed and removed before the commitment is delivered to the seller. 

Urban legend #5

A seller has no right to terminate under the Financing Contingency.

The truth: Lines 247-249 state, “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.” Therefore, once the buyer’s deadline for delivery has passed on line 219 and the seller has not yet received the buyer’s loan commitment, the seller has the ability to terminate the offer by delivering to the buyer a written notice of the seller’s termination. 

Urban legend #6

A seller may never finance the deal if the offer to purchase includes a Financing Contingency.

The truth: When the buyer has submitted to the seller a rejection letter or other evidence of unavailability, the seller does have options in attempting to keep the deal together — at least in regards to financing. Unless the buyer has stated a specific loan source, for example VA or FHA, the seller has 10 days to decide whether to offer seller financing to the buyer. If the seller does not wish to offer seller financing, the offer will be null and void after 10 days. If the parties agree that they do not want to wait the full 10 days, the WB-45 Cancellation Agreement & Mutual Release may bring the transaction to an immediate end. When a seller chooses to exercise this section of the offer, the seller actually becomes the buyer’s lender, allowing the seller to finance the buyer’s purchase on the same terms agreed on in the Financing Contingency. This section does not give the seller authority or opportunity to play matchmaker by finding the buyer a third-party lender to finance the transaction.

A buyer writing an offer on any property should carefully consider lines 252-256. Although many sellers lack interest or resources to provide financing for the buyer, that may not be the case when the property is bank-owned. Regardless of who the seller is, if the buyer does not wish for the seller to have the ability to finance the transaction on the terms stated within the Financing Contingency, then the buyer may wish to strike lines 252-256. However, the buyer should keep in mind the potential advantage of having the bank as the seller — the buyer may have one additional opportunity to obtain financing when other attempts have failed. 

Urban legend #7

Buyers must provide multiple rejection letters and letters of unacceptability. 

The truth: According to the terms and conditions of the Financing Contingency, the buyer agrees to promptly apply for financing. If financing is unavailable and the buyer has not delivered a loan commitment, the buyer may provide the seller a rejection letter or other evidence of unavailability, as stated on lines 250-252. The seller then decides whether to self-finance the transaction.

If the buyer does not apply to more than one lender, the seller may consider a claim that the buyer did not act in good faith and with due diligence to obtain financing, assuming that the buyer fails to produce evidence on the contrary. However, the buyer may attempt to argue that the contract does not obligate the buyer to provide more proof. This argument may have to be resolved through the parties’ legal channels, which is why the seller may wish to attempt to modify the terms of the agreement during early negotiations.

Urban legend #8

When an offer does not include a Financing Contingency, the agreement is a cash deal with no guidelines. 

The truth: The offer includes the “If This Offer is Not Contingent On Financing” provision that automatically applies if the buyer does not include a Financing Contingency. This provision will help parties understand that all offers without financing contingencies are not necessarily “cash offers.” At the same time, the provision requires that the buyer, within seven days of acceptance, provide written evidence from a financial institution, or third party in control of funds, that the buyer will have the amount required for the purchase available at closing. 

If the buyer does not provide this evidence within the seven days, the seller may terminate the offer. There is no deadline given for the seller’s termination. The “If This Offer is not Contingent on Financing” provision also acknowledges that buyers may choose to obtain financing from a lender even though they did not include a Financing Contingency but won’t enjoy the benefits and protections of that contingency. If the buyer wishes to have a Financing Contingency, he would need to check the box at line 217 and complete the financing provisions. The language permits the buyer to have the property appraised, so the seller must give the appraiser access to the property — but that does not mean that an appraisal contingency exists. Buyers who want to have an appraisal contingency should check the box at line 264.

Cori Lamont is Director of Regulatory Affairs for the WRA.

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