A buyer enters into a sales contract to purchase a home. The contract includes a contingency that the buyer must obtain financing within 21 days. If the buyer fails to secure financing within the specified timeframe, and the seller chooses to terminate the contract, what is the typical outcome regarding the earnest money?
- AThe earnest money is split equally between the buyer and seller.
- BThe earnest money is returned to the buyer because the contingency was not met.
- CThe earnest money is forfeited to the seller as liquidated damages.
- DThe earnest money is held in escrow until a court determines its disposition.
Show answer & explanationAnswer & explanation
Correct answer: B. The earnest money is returned to the buyer because the contingency was not met.
If a contract contains a financing contingency and the buyer is unable to obtain financing within the specified period, the buyer typically has the right to terminate the contract, and their earnest money is returned. This is because the contingency was a condition that was not met.
Why the other options are wrong
- A. Splitting earnest money is not a standard outcome for an unmet contingency; it usually goes to one party or the other.
- C. Earnest money is forfeited if the buyer breaches the contract, not if a financing contingency (which is for the buyer's protection) is not met.
- D. While earnest money is held in escrow, its disposition in this scenario is typically governed by the contract's contingency clauses, not necessarily requiring court intervention.
Financing Contingency
A clause in a sales contract that makes the contract's enforceability dependent on the buyer obtaining a specific type and amount of financing within a stated period. If the buyer cannot, they can usually terminate and receive their earnest money back.
- Protects the buyer from losing earnest money if financing falls through.
- Specifies a deadline for loan approval.
- Requires the buyer to act in good faith to obtain financing.
- If not met, the contract can be terminated without penalty to the buyer.
Memory trick: C.O.N.D.I.T.I.O.N.S. - Contingencies, Options, Negotiations, Deadlines, Inspections, Termination, Insurance, Other.