The new financing contingency provisions appear to provide a stark choice for buyers and sellers.
Paragraph 3 of the Financing and Appraisal Continency Addendum is titled, “Financing Contingency with Automatic Extension.” Paragraph 4 of the Contingency Addendum is titled, “Financing Contingency with Automatic Expiration.” To the lay observer, this is a choice of polar opposites.
While there is much to address with the new Contingency Addenda released by NVAR on July 1, 2019, this writing will reveal the illusion of the perceived contrast between the two choices.
In comparing the options provided in provisions 3 and 4, let’s assume a 21-day contingency for both. Under provision 3, at the time the 21 days expires, the contingency continues, unless and until the seller decides to deliver the 3-day notice to the buyer, at which point the buyer must decide whether to void the contract or not. In the event the seller does not deliver the 3-day notice, the buyer’s financing contingency will continue (“automatic extension”) up to and including Settlement date.
Whereas, under provision 4, at the time the 21 days expires, the buyer’s contingency terminates (“automatic expiration”). The seller, therefore, has no decision about whether to deliver the 3-day notice to the buyer as the buyer no longer has a financing contingency. Consequently, if the buyer does not perform at closing, the buyer will be in default.
It still looks like a stark contrast, but as we wave our magic wand, the illusion is revealed.
Under provision 3, even with an open financing contingency, the buyer will be in default if they do not perform on the settlement date. The only way a buyer escapes potential default under provision 3 is if they receive a written rejection letter for the specified financing and deliver it to the seller. In other words, in the absence of a written rejection letter, the buyer is in the exact same position regardless of whether provision 3 or 4 is selected as the financing contingency.
The question becomes, how often do buyers receive written rejection letters? In a word, rarely! Consider all the real estate transactions on which you have been involved as a real estate agent – how many of those transactions fell apart because the buyer got a written rejection letter for the loan? I would humbly suggest that unless you are very unlucky, it is likely less than 5%. In fact, after polling a few area top loan officers, most say that 1% or less would be flat out denied and that it is very rare, especially when agents and borrowers are using a local, reputable lender.
The lifting of the financing contingency illusion should assist buyers, sellers and their agents in navigating and ultimately coming to terms on what otherwise appears to be a choice between polar opposites.