Financing commitment contingency

The seller accepted an offer that included a financing commitment contingency. The offer indicated conventional financing. The seller received an FHA amendatory clause from the lender. The seller also knows there are property conditions that will not meet FHA requirements, which is why they chose an offer with conventional financing. Does the seller have to sign the FHA amendatory clause? Can the buyer switch their financing after acceptance?

If a seller chooses not to sign an FHA amendatory clause, the lender will likely not issue the loan. If the buyer intends to move forward, the buyer will still need to provide a loan commitment by the deadline, otherwise the buyer will need to show proof of financing commitment unavailability.

If a buyer started out with conventional financing in the offer and switches to FHA financing, the buyer can provide the FHA loan commitment and still satisfy the terms of the financing commitment contingency. The terms of the financing commitment contingency allow a buyer to submit a loan commitment for the loan described in the offer or any other loan acceptable to the buyer. See lines 270-271 of the WB-11 Residential Offer to Purchase. 

If the FHA appraisal report identifies property conditions that would disqualify the property for FHA financing, the buyer appears to have two choices: either find different financing or initiate an amendment for the seller to agree to allow the repairs. However, the seller does not have to agree to such an amendment.

Additionally, if the buyer delivers a rejection for FHA financing instead of conventional financing, the seller may argue that the FHA rejection letter does constitute financing unavailability under the offer to purchase.

Is there a risk for the buyer if the buyer changes from conventional to FHA financing?

Changing the source of financing could be a risk to a buyer if a buyer is denied financing. Consider the situation in which a buyer’s offer was contingent on financing and the buyer specified conventional financing. The buyer then applies for FHA financing and is denied. The buyer delivers the rejection of FHA financing to the seller in an attempt to demonstrate the buyer is unable to satisfy the financing commitment contingency and can then get out of the offer. The language in the Financing Commitment Unavailability section of the WB-11 Residential Offer to Purchase at lines 284-287 specifies that, “If a financing commitment is not available on the terms stated in this offer (and Buyer has not already delivered an acceptable loan commitment for other financing to the Seller), Buyer shall promptly deliver written notice to Seller of same including copies of lender(s)’ rejection letter(s) or other evidence of unavailability.”

The seller could easily make the argument that an FHA rejection in an offer contingent on obtaining a conventional loan commitment is not evidence of financing unavailability. In this situation, the deadline for delivery of the loan commitment may pass without the buyer delivering a loan commitment, and per the Seller Termination Rights section at lines 281-283 of the WB-11 Residential Offer to Purchase, the seller would be able to terminate the offer.

“SELLER TERMINATION RIGHTS: If Buyer does not deliver a loan commitment on or before the Deadline on line 250. 

Seller may terminate this Offer if Seller delivers a written notice of termination to Buyer prior to Seller’s Actual Receipt of written loan commitment from Buyer.”

What can a seller do to prevent a buyer from submitting an offer contingent on conventional financing and then switch to government-backed financing? 

If a seller wants to prevent a buyer from submitting an offer contingent on conventional financing and then switching to government-backed financing, the preprinted language of the offer to purchase will need to be modified. The preprinted provisions permit a buyer to satisfy the financing commitment contingency by delivering a loan commitment for the loan described in the offer or for any other loan acceptable to the buyer. If a seller receives an offer that is contingent on conventional financing, a seller could use a WB-44 Counter-Offer to delete the language “or another loan acceptable to Buyer” on line 271 from the WB-11 Residential Offer to Purchase.

This limits the buyer, however, to just one option for satisfying the financing commitment contingency. For example, if the buyer includes terms in the financing commitment contingency but delivered a loan commitment with terms that differed from those in the contingency, the seller could argue that the financing commitment contingency was not satisfied. Certainly, if a seller were willing to accept that loan commitment as satisfaction for the contingency, the parties could proceed. If the seller were looking for a way to stop the transaction from going forward, however, the seller could claim that the financing commitment contingency was not satisfied and deliver a notice of termination if the deadline in that contingency passed before the buyer could deliver a loan commitment for the loan described in the offer.

Another alternative for a seller to address this issue would be to include language in the offer stating that a government-backed loan commitment shall not satisfy the financing commitment contingency. This information could be included in the additional provisions if the buyer were aware of this restriction. If the language was not included in a buyer’s offer, the seller could use a WB-44 Counter-Offer to add this additional language. 

Government-backed financing plays an important role in many real estate transactions and may be especially helpful for first-time homebuyers to become homeowners. Due to down payment requirements and credit requirements that are more forgiving than conventional financing, government-backed financing may allow some buyers to move beyond barriers to homeownership.

There are, however, some situations where government-backed financing is not suitable for the transaction, whether it is condition issues, a seller’s unwillingness or inability to make repairs, or for example, a seller who does not want the buyer to be able to get out of the transaction under the FHA amendatory clause if the appraisal is low. In those transactions, it may be in everyone’s best interest to restrict offers to those that are not contingent on government-backed financing or to modify the financing commitment contingency such that a buyer could not use a government-backed loan commitment to satisfy the contingency.

Lender requirements 

The seller accepted an offer that includes the financing commitment contingency but no appraisal contingency. The buyer is requesting an appraisal be completed because the lender is requiring it. Does the seller have to allow the appraisal?

If the offer was drafted with no appraisal contingency, then the appraisal contingency is not a part of the offer and the buyer does not have the protection of the appraisal contingency. 

However, if an appraisal is needed to satisfy another contingency in the offer, such as the financing commitment contingency, the buyer would be allowed to have an appraisal done. This does not mean that there is an appraisal contingency.

Lines 182-184 of the WB-11 Residential Offer to Purchase state:

“Seller agrees to allow Buyer’s inspectors, testers and appraisers reasonable access to the Property upon advance notice, if necessary, to satisfy the contingencies in this Offer.” Also, lines 258-259 the WB-11 Residential Offer to Purchase say, “Seller agrees to allow lender’s appraiser access to the Property.”

As such, the lender’s appraiser would be allowed access to the property to satisfy the financing commitment contingency, even if the offer does not include an appraisal contingency.

Financing commitment unavailability

The offer to purchase on a property does not include an appraisal contingency, but there is a financing contingency. The loan was turned down because the appraisal didn’t come in at the purchase price. Is this a valid reason for the buyer to walk from the offer?

Lines 182-184 of the WB-11 Residential Offer to Purchase state, “Seller agrees to allow Buyer’s inspectors, testers and appraisers reasonable access to the Property upon advance notice, if necessary, to satisfy the contingencies in this Offer.” Also, lines 258-259 the WB-11 Residential Offer to Purchase say, “Seller agrees to allow lender’s appraiser access to the Property.”

As such, the lender’s appraiser would be allowed access to the property to satisfy the financing commitment contingency, even if the offer does not include an appraisal contingency. If the lender will not provide the buyer a loan commitment because of a low appraisal or any other reason, the buyer would need to provide evidence of commitment unavailability if the buyer cannot or does not wish to move forward.

Lines 284-287 of the WB-11 Residential Offer to Purchase provide:

“If a financing commitment is not available on the terms stated in this Offer (and Buyer has not already delivered an acceptable loan commitment for other financing to Seller), Buyer shall promptly deliver written notice to Seller of same including copies of lender(s)’ rejection letter(s) or other evidence of unavailability.”