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Subject to Financing Clause

Here is some ideas about how to write a subject to financing clause to keep the contract together. First a subject to financing clause like the following in green. Although it may look adequate, there are some serious flaws that need correcting.

Before proceeding, please read my Disclaimer Here

"This offer is subject to the buyer obtaining suitable financing at a lending institution of the buyers choice. Said financing shall be deemed arranged unless the buyer notifies the seller or the seller's lawyer in writing within 5 days. If said notice is given within the 5 days that the buyer is unable to obtain said financing, then this contract shall be declared null and void and the buyers deposit shall be returned immediately in full without interest or penalty."

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What You May Want to Change with that

Subject to Financing Clause

What you may be concerned about in the above subject to financing clause, are as follows:

  • There is no mention of the amount being financed. How much down payment does the purchaser have to invest?.

Why? The stronger the down payment, the stronger the offer. 5% is better than 0%, 10% is better than 5% and 25% is better than 10%. The reason for this, beside the fact that the purchaser has more money towards the purchase, is the fact that the banks are feeling far less nervous.

If the purchaser should suddenly find that they can't make mortgage payments at some point in time, the bank will be much more likely to recover most, if not all, their monies.

  • Within 5 days.

The second concern is the time frame. Within 5 days of what? Are they business days? Are they 5 days in a row including holidays and week-ends? Is it 5 days from the signing of the contract. What is a day? Is it 24 hours from the time the contract was signed or does it start at midnight or perhaps high noon?

When writing or looking at a subject to financing clause, use dates! "On or before the 10th Day of August 2017." You can even go as far as by 5:00pm EST. The more precise a clause is written, the less chance of misunderstanding between the parties to the contract.

Need some for sale by owner contracts? Head on over to the best of the best for sale by owner forms.

Go here for more information on Time Frames

  • Deemed arranged.

The third concern I have is the deemed arranged. I never liked that term. What happens if you never receive the written notice? The mortgage may have been refused at the first lender of choice and financing is trying to be arranged elsewhere.

Meanwhile, you the for sale by owner, are feeling everything has been arranged. You may have put an unconditional offer on another property and are busy packing.

subject to financing clause

But, Isn't the Buyer Obligated to Purchase Now?

Yep, they are now "legally" obligated to complete the contract. The old saying is; "You can't get blood from a stone." They may be legally bound, but if they can't secure the mortgage, it doesn't matter.

The best you the for sale by owner will probably end out with, is the deposit of $xxx amount of dollars. This is another reason why $500.00 deposits in my opinion are useless.

You are now under pressure to find another purchaser and may have to take far less money than the first offer to put everything together.

Before this gets too negative, lets fix it, OK?

Fix the Subject to Financing Clause First

First of all, don't be shy. When you are selling a house for sale by owner, there is plenty at stake, not the least which is money.

A Visitor's Comment

Well, I've read your site in entirety twice and my house is going up within weeks.

You, as the for sale by owner, have every right to ensure that all clauses are written in such a way as to protect all parties to the transaction.

Here might be a better way to write the subject to financing clause:

This offer is subject to the buyer obtaining a mortgage for the property being purchased of approximately 95% of the purchase price, for a 5 year term, amortized over 25 years at an interest rate not to exceed 6.0%. Said financing shall be arranged on or before the 31st day of August 2015. If the buyer is unable to obtain said financing on or before the 31st day of August 2015, the buyer or the buyer's lawyer shall notify the seller or the seller's lawyer in writing and this contract shall become null and void and the buyer's deposit shall be returned in full without interest or penalty. If the financing is approved, the buyer shall request that the lender supply a commitment letter stating approval of financing to the buyer and if successful, give a copy of the commitment letter to the seller or the seller's lawyer.

This subject to financing clause is much better for all parties for the following reasons:

  • The terms are laid out very clearly. The purchaser is protected in case interest rates suddenly spike to a much higher rate. It doesn't stop the purchaser from going with different terms if they so desire and can afford to make that change.

  • The dates that everything is to be accomplished, are clear and concise. Written notice must be given if financing falls through.

  • A commitment letter from the lender is a real plus. Unfortunately, under contract law, as with any clause, you can't demand something from a 3rd party who is not actually part of that contract. The contract is between you the seller and the buyer. The lender is a third party that helps fulfill the contract, but is not a party to the contract.

Having said that, asking the purchaser to make an effort to obtain that commitment letter from the lender, does not obligate the lender by contract law, to fulfill that request. It is only a request to the purchaser, whom is after all, a party to the contract. The purchaser, as stated in the clause, must actually make the effort to request the letter of commitment from the lender.

In my experience, the majority of lenders do not have any reservations of supplying a commitment letter. That being said, when it concerns fulfillment of the subject to financing clause, there is usually some added words that generally state that should something change that would disqualify the purchaser, the lender can retract the approval.

This actually rarely happens, but you should be aware that things do happen. Lets look at what could happen with a well written subject to financing clause with a quick extreme example. Everything is approved and the purchaser suddenly drops dead.

Although there is usually written somewhere in the fine print that the contract is still in force, this usually doesn't happen. The property is still suppose to close, but by the estate of the deceased purchaser.

What will happen in many cases, is the understanding for sale by owner will nullify the contract and other parties in a chain of any other real estate contracts tied to the original, will do likewise.

If this ever happens to you, your best choice is to talk to your real estate lawyer and let him or her handle things from that point. OK?

When Good Deals Go Bad 

Even though the above headline on this subject to financing page may sound like an old time country and western tune, sometimes the purchaser has a hard time obtaining financing.

They trundle off to their favorite big bank and they get turned down.

What should you do about this situation? Well, when it comes to the subject to financing clause , it depends. You could:

  • Accept the offer null and void and look for the next purchaser.

If the purchaser could not obtain financing as laid out in the contract, they most certainly can bring you a written notice that the offer is null and void and request their deposit be returned. As a for sale by owner, you may decide that the offer is dead and part your separate ways.

  • Extend the subject to financing clause for a further time period if requested.

The purchaser may request an extension of a few days to put the financing in place. Ask them why they need the extension. It may be something as simple as they hasn't received funds from a parent for the down payment due to the release of tied up funds.

They may need a release from a bad credit report that was erroneously placed there by mistake. This stuff happens!

I personally had a set of tires that were never paid for on my credit record. It was placed there by mistake on my credit report, when it actually belonged to another person of the same name, including my middle initial.

If the reason seems legit, why not offer the buyer some more time to put the financing in place. If you have no other offers in place and you are still actively marketing your house for sale by owner, you have nothing to lose.

Subject to financing clause hint: Keep the time as short as possible. If the reason for failure to obtain financing is the purchaser was just shy of qualifying, or their credit was a bit shaky but not horrific through the lender of their choice, you may want to consider the next option and possibly save the deal.

Here is a lets keep this subject to financing clause together idea.

  • Sit down with the buyer and have a friendly helpful chat.

Your conversation may go something like this.

You: I'm very sorry John and Mary that your bank turned you down. What seemed to be the problem?

Mary: We had a couple of credit issues a few years back when John was out of work and the bank didn't want to take a chance on us I guess.

You: I know what you mean. Sometimes these folks seem to hold things against you forever! Tell me, if you could get the financing, are you still interested in living here in this home?

John: In a heartbeat. We are so disappointed in the bank's decision, but what can you do, huh?

You: Listen, I can't promise you for sure, but if I could find you a way to secure that financing, would you be willing to try?

John, (raising one eyebrow), looks at Mary.

Mary: I think we'd be willing to give it a try, if you would be willing to help us in some way.

You: Great, let me show you a way that might just help you put everything together.

After having the purchaser's sign an extension of the subject to financing clause, you direct John and Mary to a mortgage broker. When I was a Realtor, I used mortgage brokers extensively for the buyers I worked with. My wife and I also always used mortgage brokers for our own personal needs.

If John and Mary can put the financing together after being turned down by one lender, it will probably be with a mortgage broker.

I've seen it happen more than once. As a bonus, there is a good chance a mortgage broker will be able to get a better interest rate as well for the buyers. John and Mary are going to love you!

Subject to Financing Clause

A Win, Win

If you end out using option 3 above  it's a win, win situation. You win because your house is sold and John and Mary win because they get to live where they want to and start building equity.

I've covered mortgage brokers on another page but in case you are unfamiliar or haven't read that section yet, you can go to What is a Mortgage Broker

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