By Beau Brincefield
Section 9B of the current (9/99) Regional Sales Contract Form provides:
LENDER’S APPROVAL CONTINGENCY. This Contract is contingent until 9 p.m. ______ Days after Date of Ratification (“Deadline”) upon the Purchaser Delivering to the Seller a letter from the lender stating that the Purchaser is approved for the Specified Financing (“Lender’s Letter”). Upon Seller’s receipt of the Lender’s Letter, this Contract is no longer contingent on the Purchaser being approved for the Specified Financing and this Contract will remain in full force and effect.
The financing contingency provisions contained in this paragraph are very important because they allocate the financial loss that will be suffered by the buyer or the seller if the buyer is not able to obtain any financing needed to purchase the property.
If the financing is turned down before the financing contingency is removed, the seller will bear the financial loss of keeping the property off the market while the purchaser tried to obtain financing.
If the financing contingency has been removed, but the lender later rejects the loan or refuses to fund the loan at settlement for any reason, the financial loss falls upon the purchaser because, once the financing contingency has been removed, the purchaser will be in breach of contract if the purchaser thereafter fails to settle on the property.
This result follows even though the purchaser may have made every good faith effort to obtain the financing and even though the financing may have fallen through for some reason beyond the purchaser’s control (for example, loss of a job, serious injury or illness, death of a spouse, etc.). Therefore, it is extremely important to both purchaser and seller to know whether or not the financing contingency has been removed from the contract. (References in this article to “purchaser” and “seller” should be understood to include their respective agents).
How do the parties to the contract and their REALTORS® know, for sure, that the financing contingency has been removed?
The only absolutely clear and unequivocal (and, therefore, the safest) way to be certain that the financing contingency has been removed is to obtain a written addendum to the contract, signed by the purchaser, acknowledging that the financing contingency has been removed.
Beyond this, the parties to the contract and their real estate agents must rely on principles of contract interpretation to determine whether or not the financing contingency has been satisfied. If it becomes necessary to interpret the financing contingency language in the contract, you must begin by looking, carefully, at the specific contingency language in the contract form.
If the purchaser transmits to the seller a letter from a lender that affirmatively states that the purchaser “has been approved for the Specified Financing”, that would appear to be fairly strong evidence that the purchaser intends to remove the financing contingency. Unfortunately, as we all know, it is extremely unusual for a lender to give such an unequivocal “approval” letter containing the “magic words” described above.
There may be such a thing as a non-contingent lender approval letter but few, if any of us, have ever seen one. Normally, a lender “approval” letter will state only that the loan is approved “subject to” certain contingencies. For example, even though many letters from lenders appear to say that a borrower’s loan application has been “approved”, the letter will also make it clear that “final approval” is contingent on the satisfaction of various credit underwriting requirements, such as employment verifications, satisfactory credit report, income and expense verifications, etc. Even if the loan “approval” letter is not contingent upon these types of underwriting contingencies, virtually every “approval” letter from a lender will state at least that the “approval” is contingent upon there being no deterioration in the purchaser’s financial position (employment, money in the bank, etc.) between the time of loan approval and the time of settlement.
Thus, even where a lender letter says that a loan has been “approved”, there will still remain some uncertainty until settlement as to whether or not the loan will actually be funded. Therefore, even after delivery of a lender’s letter stating that the purchaser’s loan has been “approved”, the safest course of action would be to ask the purchaser to confirm, unequivocally, in writing, that the financing contingency has been removed.
Lenders often issue letters to potential borrowers or loan applicants that express much less than a real loan “approval” or “commitment” to make a loan. For example, some lender letters say little more than that the purchaser “appears to be qualified” for the specified financing. Other lenders say things like “the loan applied for appears to be an approvable loan”. Whatever the language used, if it fails to include the “magic words” (that is, that the Purchaser has been “approved for the Specified Financing”), problems abound. If the buyer provides to the seller such a “lender letter” that reflects something less than an “approved” loan, does the letter constitute a “Lender’s Letter” as defined in Section 9B of the Contract? Would it remove the financing contingency? Many knowledgeable people in Northern Virginia believe that it would. Some of the judges on some of the benches in Northern Virginia would agree – at least on some days. But why take the chance of getting the wrong judge on the wrong day?
In general, the stronger the “approved” aspect of the letter from the lender is, the more likely it will be that the delivery of the letter to the seller will remove the financing contingency. No matter how strong the lender letter appears to be, however, the best course of action is still to get a signed addendum to the contract from the purchaser stating, clearly and unequivocally, that the financing contingency has been removed. If that is done, and the loan later falls through, there will be no room for disagreement between the purchaser and seller as to who must bear the financial consequences of the purchaser’s inability to obtain financing.
Beau Brincefield is the senior attorney with the law firm of Brincefield, Hartnett & Kahn, P.C., in Alexandria, Virginia.