A financing contingency makes the contract contingent upon the buyer obtaining the financing necessary for the purchase. Generally, the buyer must apply for financing within a certain number of days of the contract’s creation. If the buyer is unable to obtain the financing despite a good faith effort to do so on or prior to the closing date, then the contract expires and the parties are relieved of their contractual obligations. Because the buyer had a valid reason for being unable to perform under the contract (i.e. purchase the property), the earnest money should be returned to the buyer.

In some instances, the contract may indicate that the contingency is waived after a certain number of days. Alternatively, the contract may give the seller the right to demand that the buyer waive the contingency prior to closing, or face termination of the contract by the seller. These provisions are obviously beneficial to the seller at the buyer’s expense. If the buyer waives the financing contingency prior to closing, the buyer runs the risk that a problem will develop with the financing (e.g. buyer loses job and no longer qualifies for loan) but the buyer will still be obligated to purchase the property. Under these circumstances, the buyer will probably be in breach of contract.