When a buyer's financing falls through, the seller is not without recourse. Based on our experience assessment, the seller's primary options include moving to a backup offer, renegotiating the sale terms with the original buyer, or relisting the property. The outcome heavily depends on the contract's contingencies and the point in the transaction process where the financing fails. With nearly three-quarters of home purchases relying on loans, understanding this risk is critical for sellers.
What is a Financing Contingency?
A financing contingency (also called a mortgage contingency) is a clause in a purchase agreement that protects the buyer. It allows them to cancel the contract and reclaim their earnest money deposit—a good-faith sum paid to show serious intent—if they cannot secure a loan within a specified period, typically 25 to 30 days. This contingency is a standard safeguard for buyers, but it means the sale is not guaranteed until their loan is fully approved.
Why Does a Buyer's Loan Approval Fail?
A mortgage application can be derailed at several stages for various reasons. The most common issues include:
- Change in Financial Status: If the buyer loses their job or experiences a significant drop in income before closing, they may no longer meet the lender's debt-to-income requirements.
- Low Appraisal: Lenders will not issue a loan for more than a property's appraised value. If the appraisal comes in lower than the purchase price, the loan-to-value ratio is affected, potentially killing the deal unless the gap is bridged.
- New Debt Obligations: A major purchase, like a new car or furniture, before closing can increase the buyer's debt-to-income ratio beyond the lender's allowable limits. "Adding additional debt can tank the buyer's loan approval," notes investor Ron Myers.
- Unmet Underwriting Conditions: During underwriting, the lender may request additional documentation. If the buyer cannot satisfy these conditions, the loan may be denied.
What Are the Seller's Options When Financing Falls Through?
When a buyer fails to secure financing, the power typically shifts back to the seller, as the buyer has not met the agreement's terms. The seller's path forward depends on their specific situation.
- Activate a Backup Offer: In competitive markets, sellers often accept one or more backup offers. If the primary deal collapses, the seller can seamlessly cancel the first contract and proceed with the backup buyer, avoiding a return to the market. "I have actually closed two deals this year with the executed backup offer we had in place," says Phoenix agent Stacy Miller.
- Renegotiate with the Original Buyer: If no backup offer exists and the buyer is motivated, the seller can work to resolve the financing issue. This might involve offering the buyer a credit to cover a low appraisal gap, renegotiating the purchase price, or even helping the buyer find a new lender.
- Relist the Property: If other options are unavailable, the seller can terminate the agreement and relist the home. While this costs time, the property re-enters the market with the advantage of already having been under contract, which can signal desirability to new buyers.
How Can Sellers Mitigate This Risk?
Proactive sellers can take steps to reduce the likelihood of a financing failure.
- Require a Pre-approval Letter: Insist that buyers provide a lender's pre-approval letter, not just a pre-qualification. A pre-approval involves a more thorough credit and financial check.
- Shorten the Contingency Period: Negotiate a shorter financing contingency window (e.g., 21 days instead of 30) to quickly identify if the buyer has loan issues.
- Evaluate Offer Strength: Consider the robustness of the buyer's financial profile alongside the offer price. An all-cash offer or one with a large down payment may be stronger than a higher-priced offer with a minimal down payment.
For sellers, a buyer's financing falling through is a common setback, but it is rarely a dead end. The optimal strategy involves requiring strong buyer pre-approvals, encouraging backup offers, and understanding the renegotiation options available to salvage a sale when possible.
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