What is a financial contingency in a real estate deal? Will I need one?

In most real estate transactions involving co-ops or condos, the prospective buyer will require some form of financing from a lending institution to complete the purchase. Typically, buyers will be required to put forth a deposit or down payment amount, especially in competitive markets, which can be a significant amount of money, depending on the specific property in question. In any case, the financial contingency clause in a real estate transaction includes the provision that a prospective buyer can cancel any signed real estate contract, as well as receive a refund of any deposit or down payment amount, if the buyer is unable to locate a suitable lender in sufficient time. For any interested buyer, the financial contingency clause essentially ensures the return of their money, in the event a lender backs out of a home loan agreement or if the prospective buyer cannot locate a lender.

In the past, financial contingency clauses were not necessarily relevant to “strong” buyers with reasonable credit history and income. However, as lenders have clamped down on lending, even to relatively strong buyers, the current state of the lending markets may come as a shock to certain prospective buyers. For this reason, having a financial contingency clause can prove beneficial to any buyer. Traditionally, having a financial contingency on a prospective deal provoked distate from sellers, as it was indicative of the buyer’s uncertainty in ability to obtain financing. However, in today’s lending market, it is understood that even the most qualified loan applicants are not guaranteed lending approval. Unless paying in cash for the entire purchase, the general rule is that having a financial contingency clause in any pending deal is in the best interest of the buyer. For more information, consult with a real estate lawyer in your state to learn more.