Financing Contingency Expiration in Virginia, Washington DC, Maryland

Cautions about Financing Contingencies in Virginia, DC, MD

In my continuing effort to educate folks about relevant recent experiences that might be useful reminders to buyers and sellers alike, I offer my latest topic of discussion regarding the Expiration of Finance Contingency.

Most local regional home resale contracts are drafted with a financing contingency deadline. Typically this deadline is 21-30 days long but that can vary.

An important note to keep in mind for home buyers and sellers alike is that depending on the contract written, this contingency is usually automatically continued until the seller initiates a NOTICE to the buyer giving 3 days to remove the contingency or the contract becomes void. While the Contingency is "Active", the buyer's earnest money is protected for financing issues, until the contracted settlement date.

Now it is important for buyers to understand that removing a finance contingency should rarely be done unless forced to do so by such a NOTICE.

Additionally, caution should be used to be sure the buyer has received a solid contingency free loan commitment by the lender, and also if the buyer has exceptional confidence that extenuating circumstances beyond their control are not going to happen (i.e. losing your job unexpectedly).

Sellers however, SHOULD initiate the NOTICE immediately in order to protect their interests. If a deal is going to fall apart, it is better to learn about it sooner and move on to finding another buyer, than to risk wasting time on a buyer that has issues with getting their loan approved. But keep in mind, that forcing the buyer into that corner could kill the deal if the buyer is unwilling to release the contingency.

The Northern Virginia and the Greater Capital Area conventional contracts both have provisions for financing contingencies and these contingencies usually can go down any one of 3 likely paths once the contingency period expires.

For FHA and VA loans, refer to those respective Addendums detailing the terms, but the process is similar.

Upon expiration of the contingency period (and NOTICE given by seller), the options are:

1. The buyer is obligated to remove the finance contingency and acknowledge that the earnest money is at risk in the event of default. 
2. The buyer decides that they can not risk eliminating the contingency and decides instead to forfeit their contract on the property.
3. The buyer requests an extension of the deadline, to which the seller may or may not be willing to comply. If the seller is not willing to comply, the transaction dies and the buyer technically forfeits their contract to purchase the property, the seller is then free to pursue other buyers.

In scenario 3 above, in the event that the buyer is able to solidify the financing before the seller secures another buyer, the parties could in theory still settle on the property if they are willing and able to do so "Out of Contract".

This is not legally a very "tidy" way to handle the situation but it is plausible and does happen from time to time.

This article is strictly experiential in nature over 16 years in this Real Estate industry. Dan Bouchard is NOT an attorney and this article should NOT be construed as legal advise. Please consult competent legal counsel regarding your specific situation.