Finance Clause When Buying A House

Here’s an explanation of the finance clause in a home purchase agreement, formatted as requested:

The finance clause, also known as a mortgage contingency, is a crucial provision in a real estate purchase agreement that protects the buyer. It makes the purchase contingent upon the buyer obtaining suitable financing for the property. In essence, it gives the buyer an “out” if they are unable to secure a mortgage loan on terms that are acceptable to them.

Why is this clause so important? Securing a mortgage is often the biggest hurdle in buying a home. Without a finance clause, if a buyer’s mortgage application is denied, they are still legally obligated to purchase the property. They could lose their earnest money deposit and potentially be sued by the seller for breach of contract. The finance clause mitigates this risk.

A typical finance clause will outline several key elements:

• Loan Amount: Specifies the amount of the mortgage the buyer intends to secure.
• Interest Rate: Indicates the maximum acceptable interest rate. Buyers generally want a clause that gives them some flexibility, allowing for rates slightly higher than current market rates.
• Loan Term: Specifies the desired length of the mortgage (e.g., 30 years, 15 years).
• Deadline for Approval: Sets a specific date by which the buyer must obtain mortgage approval. This is a critical detail; if the buyer doesn’t secure approval by this date, they may lose the protection of the clause.
• Conditions of Approval: Sometimes, the clause can specify certain conditions of the mortgage approval that are acceptable to the buyer (e.g., no requirement for private mortgage insurance, no excessive origination fees).

The process typically works as follows: After the purchase agreement is signed with the finance clause, the buyer applies for a mortgage. They must act in good faith and diligently pursue financing. If the buyer is unable to obtain a mortgage that meets the conditions specified in the finance clause by the deadline, they must notify the seller in writing. This notification typically includes a denial letter from a lender.

Upon proper notification, the purchase agreement is usually terminated, and the buyer receives their earnest money deposit back. The seller is then free to relist the property and find another buyer.

It’s essential to understand the fine print of the finance clause. For example, some clauses may require the buyer to apply to multiple lenders. Others may obligate the buyer to accept a higher interest rate within a certain range. Furthermore, failing to meet the deadline for approval can void the protection of the clause, even if the buyer legitimately can’t secure financing. Always consult with a real estate attorney to ensure you fully understand the terms and implications of the finance clause before signing a purchase agreement. Sellers may sometimes be hesitant to accept offers with finance clauses, particularly in competitive markets. However, for most buyers, the protection afforded by this clause is well worth the potential inconvenience.