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What and how does a finance contingency work in real estate transactions
A finance contingency in real estate transactions in Virginia is a contractual clause that allows a buyer to back out of a home purchase without penalty if they fail to secure the necessary financing within a specified timeframe. Here's how it functions:
What and how does a finance contingency work in real estate transactions
A finance contingency in real estate transactions in Virginia is a contractual clause that allows a buyer to back out of a home purchase without penalty if they fail to secure the necessary financing within a specified timeframe. Here's how it functions:
A finance contingency in real estate transactions in Virginia is a contractual clause that allows a buyer to back out of a home purchase without penalty if they fail to secure the necessary financing within a specified timeframe. Here’s how it functions:
  • Purpose: The finance contingency protects buyers by ensuring they aren’t obligated to follow through with purchasing a home if they cannot obtain a mortgage or loan. This clause is crucial when buyers are not in a position to pay cash for a property.
  • Implementation: When a buyer makes an offer on a property, the finance contingency is included in the purchase agreement. It states that the offer is contingent upon the buyer getting a loan commitment by a certain date. If the buyer does not secure financing by this deadline, they can cancel the contract.
  • Details: The contingency typically outlines the type of financing needed (e.g., conventional loan, FHA, VA), the loan amount, the interest rate, and sometimes the maximum number of points the buyer is willing to pay. This gives clarity to both parties on what “acceptable financing” entails.
  • Timeframe: In Virginia, the duration for this contingency can vary, but contracts often allow 10 to 21 days for the buyer to secure financing, though this can be negotiated. If the buyer cannot obtain financing within this period, they must provide a lender rejection letter to void the contract.
  • Options for Buyers: If financing falls through, the buyer can either extend the contingency period (if the seller agrees), proceed with the purchase without the contingency (risking losing their earnest money), or withdraw from the deal with their deposit returned.
  • Seller’s Perspective: Sellers might view finance contingencies with caution since they add uncertainty to the sale. However, in Virginia, where real estate transactions can involve high stakes, this contingency is standard practice to protect all parties involved.
  • Legal Context: The Virginia Real Estate Contract stipulates that buyers have three business days to cancel for any reason, but after this period, a finance contingency provides a legitimate reason for backing out if financing cannot be obtained.
This contingency is especially critical in markets where buyers might not have pre-approval or if there are concerns about job security or changing financial conditions that could affect loan approval. It ensures that buyers can move forward with confidence or exit the deal with their deposit intact if financing does not materialize

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