The Buyer’s financing fell through. Now what?

Your home is for sale, and you have it under contract, but the Buyer can not get financing.

The risk of this situation can be mitigated at the outset by obtaining from the Buyer a pre-approval from his or her lender. Sometimes, however, other factors cause a loan application to fail.

The residential real estate contracts most frequently used in Chicago contain a mortgage contingency provision. Generally, these provisions provide a certain period of time for the Buyer to obtain a loan commitment (i.e., approved financing). If the Buyer fails to do so, the contingency often provides a Seller with an option to try to arrange an alternate source of financing with certain, usually similar, terms. (Sometimes this option is changed or deleted in an earlier phase of the transaction, however, in which event Seller’s choices may be limited.)

News that financing has fallen through is not a welcome development for a Seller. At best, there will be a delay to closing. It also is possible that the transaction will not close. Unfortunately, the Seller will still be responsible for any mortgage payments, taxes, and assessments accruing while he or she owns the property – and potentially may have other plans delayed as well.

A Buyer must provide written notice to invoke the mortgage contingency. The question then is, what caused the loan application to fail? Two additional considerations are whether the Buyer has sufficient financial strength to proceed with the transaction if the loan were to issue, and whether another lender may offer more flexible lending guidelines.

If these factors come together favorably, it may be possible for the transaction to proceed with a different lender. Most contracts are drafted to provide an option rather than a requirement for a Seller to seek an alternate source of financing. Therefore, a Seller usually also can choose to simply move on, and either hold the property or re-list it for sale.