Financing Contingency Pitfalls
[Editor’s Note: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced. If you need legal advice, please consult an attorney.]
One of the surprises lurking in the standard Minnesota Financing Addendum is the weaker of the two clauses addressing the Buyer’s financing.
In layman’s terms, it says that if the closing date arrives and the Buyer’s financing falls through: a) there’s no deal; and b) the Buyer gets their earnest money back.
For obvious reasons, the vast majority of Sellers find that “left at the altar” scenario unattractive.
Solution: a Non-Refundable Dowry
So instead, there’s a second, stronger option stating that the Buyer has until a specified date ” usually 15-20 business days after the Purchase Agreement has been signed ” to finalize their financing.
As evidence of that, the Buyer’s lender is to provide the Seller with a “Written Statement.”
The Buyer still may not close after they deliver a Written Statement; if they lose their job, file for bankruptcy, or simply get cold feet, the closing is kaput.
However, if any of those things happens, the Seller will typically keep the earnest money as liquidated damages.
So, what happens if the Buyer can’t secure their financing by the Written Statement deadline?
If it’s because the home didn’t appraise, it’s likely that the sales price will be renegotiated.
However, if it’s because the Buyer couldn’t qualify for a mortgage, there’s no deal AND they get their earnest money back.
No Seller wants to receive that news ” but if so, it’s better to find that out relatively quickly than at closing.
See also, “Who Holds the Buyer’s Earnest Money Check ” and Why it Matters“; “Earnest Money Due After Inspection Contingency Removed”; and “Purchase Agreement: “Buyer’s Earnest Money Due After Inspection Contingency Removed.”