Buying Under a Loan Contingency

When purchasing a property, many buyers prefer to buy under a loan contingency. This condition ensures that the sale will only be finalized if the buyer secures financing. But what do you need to know to properly use this condition and avoid any issues?

What is a Loan Contingency?

A loan contingency means that the purchase becomes final only if a specific event occurs. In this case, the event is obtaining a mortgage loan. If you fail to secure the loan, you can cancel the purchase without being held liable for any penalties. This provides important security for many buyers who are not yet sure about obtaining financing.

Seller's Agreement: Crucial

The loan contingency must be clearly stated in the promise of sale or the purchase agreement, and for that, the seller’s agreement is essential. It is crucial to ensure that this condition is clearly and thoroughly written, so both parties understand exactly what they are agreeing to. Without the seller’s explicit agreement, the loan contingency cannot be activated.

Consider the Timeline

Another important aspect is the timeline for obtaining the loan. Sellers will often insist on a very short timeline, but it is essential to have enough time to submit your loan application and have it reviewed by your bank. It is crucial to discuss with your banker how much time they need to approve the loan and negotiate a realistic timeline with the seller.

Strictly Follow the Terms

The loan contingency is often very detailed. In addition to securing the loan, you may be required to provide a written refusal from two banks or send a registered letter stating that you did not receive financing. It is vital to adhere to these terms strictly. If you fail to follow the conditions, you may not be able to properly invoke the loan contingency.

What Happens If You Don’t Meet the Conditions?

If you do not meet the conditions of the loan contingency, the seller may require compensation. This compensation is typically 10% of the agreed-upon sale price. This represents a significant amount, so it is important to carefully manage the loan contingency and ensure that you comply with all deadlines and requirements.

Conclusion: Caution Is Key

When buying a property under a loan contingency, it is essential to proceed carefully. Ensure that all conditions are clearly stated in the agreement and that you have enough time to secure financing. By strictly adhering to the conditions and timelines, you will avoid any surprises and can finalize your purchase with peace of mind.