Northern Virginia Real Estate Law

The financing contingency contained in the Northern Virginia Association of Realtors (NVAR) standard residential real estate contract is often used and frequently misconstrued. In fact, I do not think that there is a term in the standard contract that more misunderstood by purchasers, sellers, agents and attorneys. This is true even though the clause was recently revised to cure the perceived ambiguities in the previous version. These revisions, I believe, have resulted in a contract in which the financing contingency in a clear and uncluttered fashion. Unfortunately, I have continued to find confusion in its application.

Part of the problem is the fact that the selection of the financing contingency contains the sentence, "This Contract is contingent upon the Purchaser obtaining loan(s) to purchase the Property." Because of this, it is common to assume that the contract is absolutely contingent upon financing, without considering the actual mechanisms of the financing contingency as set forth in its terms. I have sought to explain the financing contingency below through the well-known form of Frequently Asked Questions, although these questions are asked much more infrequently than they ought. I hope it is helpful. If you do not have a copy of the contract, you can find one here (the financing contingency is located on Page 4).

I should point out that the information provided here is not a substitute for competent legal counsel, and nothing herein should be construed as legal advice. The specific factual and legal issues that may arise will vary from case to case, and the success or failure of a claim at trial is almost always inherently uncertain. If readers have any other questions that are not answered below, they may use the Comments section, and I will try to post an appropriate response.

If the financing contingency is selected, does that mean that the purchaser will always have an "out" if he is unable to receive financing?

No. It is a common assumption that, if a contract contains a financing contingency, the purchaser will never have liability in the event financing is not approved. This is not true. Under the financing contingency, there is one—and only one—way in which the purchaser can get out of the contract: if the contingency has not been removed, and if the purchaser receives a written letter of rejection for the financing specified in the contract, the purchaser can void the contract by delivering a copy of that letter to the seller.

A purchaser has just been informed by his lender that he does not qualify for financing. What should he do to be certain that the contract is terminated?

Terminating a contract under the financing contingency (which, as we have seen, is the only way for a purchaser to obtain relief under this provision) consists of at least three requirements. The failure to observe any of these requirements may result in the purchaser breaching the contract.

First, the purchaser must receive a written rejection. Verbal notification is not sufficient. If a purchaser has been informed that his application will be rejected, he should promptly request that the denial be put in writing.

Second, the written rejection must be for the "Specified Financing", as that term is defined in the contract. The rejection should therefore indicate the financing terms applied for, and those terms should be consistent with the financing terms set forth in Paragraphs 2 and 3 of the contract. Those financing terms include the amount of the loan (including the second mortgage, if applicable), the interest rate (including whether it is a fixed or variable rate), and the duration of the loan (e.g., a 30- or 15-year loan).

Third, a copy of the written rejection should be "Delivered", as that term is defined in the contract. The method of delivery is set forth in the Virginia Jurisdictional Addendum, where the parties are supposed to fill in a physical address (if delivery is to be by first class mail or hand-delivery), a facsimile number, an e-mail address, or a combination methods. Although a courtesy copy may be sent to the broker, it should be noted that the Virginia Jurisdictional Addendum explicitly and emphatically states that delivery to the broker, shall not constitute delivery to the appropriate party. This is important, since notices are often as a matter of course sent through real estate agents.

The purchaser has been informed by his lender that he has been rejected for financing, but he does not deliver a rejection letter before the settlement date. Is it too late to do so?

Probably. The Contract states in Paragraph 26 that the purchaser is in default if he does not go to closing, even if the Financing Contingency has not been removed. Since the only way to terminate the contract under the financing contingency is to deliver a copy of the rejection, and since a failure to go to settlement is an event of default, the failure to deliver a rejection letter before the settlement date will result—under the plain terms of the contract—in the purchaser breaching the contract.

Can the purchaser terminate the contract even after the Financing Deadline has expired?

Yes. The contingency will continue, even after the Financing Deadline has expired, unless the purchaser removes or satisfies the contingency.

If the contingency continues even after the Financing Deadline, then what is the point of the deadline in the first place?

Although the financing contingency is commonly thought of as protection for the purchaser, it also exists for the benefit of the seller. The sole purpose and effect of the Financing Deadline is that it is the date that the seller can give notice of termination of the contract if the contingency has not yet been satisfied or removed by the purchaser. Upon such a notice from the seller, purchaser has three days to deliver a Regional Form #100 and, if required, either an approval letter or evidence of sufficient funds to close the purchase without financing. However, it very rare for sellers to avail themselves of this procedure under the financing contingency, so as a practical matter the date of the Financing Deadline is almost always irrelevant to the analysis of a purchaser's liability.

How does the purchaser remove or satisfy the financing contingency?

If the purchaser has checked the first box, which only requires the delivery of a Regional Form #100, then the purchaser need only deliver that form to the seller (as delivery is defined in the contract) in order to remove the contingency. If the second box has been checked, the purchaser must deliver, in addition to the Regional Form #100, an approval letter from the lender containing the six statements set forth in Paragraph 10(C), or substantially similar statements.

The purchaser has checked the second box requiring an approval letter. The lender has approved the loan, but is not willing to provide an approval letter with the required statements. What can the parties do to remove the contingency?

It can be difficult (if not impossible) to get certain lenders to provide an approval letter in the form required under the financing contingency. The best solution, assuming the parties agree that the contingency should be removed, is to simply sign an addendum removing the contingency. The addendum should make clear that the parties are waiving the requirement of an approval letter.

If the financing contingency has been removed, and the purchaser subsequently discovers that he is unable to obtain financing, is there any way to terminate the contract under the financing contingency?

No. Once the contingency has been satisfied or removed, the contract is no longer contingent upon the purchaser obtaining approval for the necessary financing.