The Financing Contingency – What Should Buyers Know?
The standard offer to purchase forms for residential property in Wisconsin (Form WB-11 and Addendum A) contain several contingencies: financing, appraisal, closing of buyer’s property, and inspection. Each of these give the buyer different rights as it relates to the offer. In this post we’ll talk about the financing contingency.
Most residential offers to purchase are contingent offers. This means that after the buyer has made the offer and the seller has accepted the offer, the sale still depends on certain conditions being met. The deal may not close if these contingencies are not met.
Terms to Include in the Financing Contingency
A financing contingency allows the buyer to make the offer dependent upon securing financing with certain terms. The buyer’s financing contingency usually includes the following:
• Minimum amount to be financed (specified as a dollar amount or as a percentage of the purchase price or appraised value)
• Minimum term of the loan
• amortization period
• Maximum initial monthly payment of principal and interest
• Discount points and/or loan origination fee not to exceed a specified percentage of the loan
• Maximum annual interest rate for fixed rate financing or maximum initial and increased annual interest rates for adjustable rate financing
• The type of loan program (e.g., conventional, FHA, FmHA, VA)
Wisconsin courts have held that a financing contingency with indefinite terms may permit either the buyer or the seller to declare the contract void. It’s important to clearly state all the terms to ensure that the offer doesn’t fall apart.
The Effect of Changing the Purchase Price
It’s typical in a real estate deal for the buyer and seller to negotiate on price. What happens to the financing contingency when the purchase price goes up or down? The Wisconsin WB-11 form states that if the purchase price of the offer is adjusted at any point during the process, the financing contingency is modified as well. The dollar amount to be financed and monthly payments are automatically adjusted to maintain the term and amortization originally stated. This allows there to be some flexibility in the negotiation without having to redo the financing terms with every counteroffer.
Delivering the Loan Commitment
When the buyer gets the financing in place, the lender will issue a loan commitment outlining the important terms. The loan commitment states the type of loan being offered, dollar amount to be financed, interest rate(s), and repayment terms. If the loan fits the parameters described in the offer or if the buyer decides that another loan is acceptable, the buyer must deliver to the seller a copy of the written loan commitment no later than the deadline stated in the offer (e.g., within 45 days of acceptance of the offer). The buyer risks having their offer terminated if they miss the contractual deadline.
If the buyer reviews the loan commitment and delivers the written loan commitment to the seller by the deadline stated in the offer, the financing contingency is deemed satisfied. In Wisconsin, this is true even if the loan commitment is subject to conditions the buyer still has to satisfy for the lender or even if the loan commitment is for a loan with terms that do not satisfy the minimums stated in the offer. Once the buyer delivers the loan commitment to the seller, the financing contingency is off the table. So, it’s important for buyers to be sure that they like the terms of the loan commitment and that they can satisfy the lender’s conditions sending the loan commitment off to the seller.
Anticipating Missed Deadlines
On the flip side, what happens if the buyer misses the deadline? What happens if the buyer simply lets the deadline pass without saying anything to the seller? The standard offer to purchase form in Wisconsin doesn’t address these situations. Buyers can save themselves from trouble by writing language into the offer. Option A: Make the offer null and void if the buyer doesn’t provide the loan commitment or waiver. Option B: Make the contingency deemed satisfied or waived if the buyer doesn’t provide the loan commitment or waiver.
Still have questions about the Wisconsin form offer to purchase and financing contingency? Murdock Law has helped many buyers with their legal duties and rights when buying a home, and their remedies when the sale doesn’t go as planned. Call us toll-free at 1-844-744-7529.