California Real Estate Broker ExaminationReal Estate PracticeMedium
A buyer makes an offer on a residential property for $750,000, contingent on obtaining a conventional loan for 80% of the purchase price. The appraisal comes back at $720,000. If the buyer is unable to secure financing for $600,000 (80% of the appraised value), and the purchase agreement includes a standard financing contingency, what is the most likely outcome?
- AThe buyer is obligated to pay the difference of $30,000 in cash to meet the original loan amount.
- BThe seller is obligated to lower the purchase price to the appraised value of $720,000.
- CThe buyer can cancel the purchase agreement and receive a refund of their earnest money deposit.
- DThe buyer must apply for a different type of loan to cover the shortfall.
Show answer & explanationAnswer & explanation
Correct answer: C. The buyer can cancel the purchase agreement and receive a refund of their earnest money deposit.
A financing contingency protects the buyer if they cannot obtain the necessary loan amount based on the appraised value. If the appraisal comes in lower than the purchase price and the lender will not finance the original loan amount, the buyer can typically cancel the agreement and recover their deposit.
Why the other options are wrong
- A. The buyer is not obligated to pay the difference unless they choose to remove the contingency or negotiate a new agreement.
- B. The seller is not obligated to lower the price; they can choose to, but it's not a requirement under a standard financing contingency.
- D. The buyer is not obligated to seek alternative financing if the contingency cannot be met with the specified loan type.
Financing Contingency
A clause in a purchase agreement that makes the sale dependent on the buyer's ability to obtain a specified loan amount or type of financing. If the condition is not met, the buyer can typically cancel the contract.
- Protects the buyer from losing their earnest money deposit if financing fails.
- Often tied to appraisal value, as lenders base loans on value.
- Requires buyer to act in good faith to secure financing.
- Buyer can usually cancel and get deposit back if contingency not met and not waived.
Memory trick: Loan contingency: if the money shield fails, you can bail.