California Real Estate Broker ExaminationReal Estate PracticeHard
A buyer makes a full-price offer on a property, contingent on obtaining a loan for 80% of the purchase price. The seller accepts the offer. Before closing, interest rates rise significantly, making the buyer's pre-approved loan no longer feasible at the original terms. The buyer's loan contingency period has not yet expired. What is the MOST likely outcome if the buyer cannot secure the specified financing?
- AThe buyer is in breach of contract and will lose their earnest money deposit.
- BThe seller can sue the buyer for specific performance to compel the purchase.
- CThe buyer is obligated to find alternative financing, regardless of the terms.
- DThe buyer can cancel the contract and receive their earnest money deposit back.
Show answer & explanationAnswer & explanation
Correct answer: D. The buyer can cancel the contract and receive their earnest money deposit back.
A loan contingency clause protects the buyer. If the buyer is unable to secure the specified financing within the contingency period, and they act in good faith, they typically have the right to cancel the contract and receive their earnest money deposit back without penalty.
Why the other options are wrong
- A. The loan contingency protects the buyer from being in breach if they cannot obtain financing, provided they act in good faith.
- B. Specific performance would not be an option for the seller if the buyer properly cancels due to an unfulfilled contingency.
- C. The buyer is only obligated to find financing under the terms specified in the contingency; significant changes (like higher rates making it unfeasible) typically allow for cancellation.
Loan Contingency Clause
A provision in a purchase agreement that makes the sale dependent on the buyer obtaining specific financing, protecting the buyer's earnest money if the loan falls through.
- Specifies loan amount, interest rate, and terms.
- Includes a deadline for loan approval.
- Allows buyer to cancel and receive deposit if unable to secure financing (in good faith).
- Must be removed in writing to proceed without this protection.
Memory trick: The loan contingency is a 'shield' for your 'money' if the 'loan' doesn't work out.