In real estate financing, which statement best describes a financing contingency?

• A. A guarantee of financing from the lender regardless of the borrower's credit
• B. A condition allowing the buyer to back out if financing fails
• C. A clause about loan interest rate changes not affecting the buyer
• D. A requirement that the seller pays closing costs

Answer: (B)

A financing contingency is a clause in the purchase agreement that protects the buyer by tying the deal to the buyer actually obtaining mortgage financing on acceptable terms. It gives the buyer the right to back out if the lender does not approve a loan within the specified time, usually with the return of earnest money. This provision recognizes that the buyer’s ability to close depends on securing financing, so if the loan falls through, the buyer isn’t locked into the contract.

It’s not a guarantee of financing from the lender regardless of credit, because a lender can still deny a loan based on credit, income, or other factors. It’s also not about changes in loan interest rates by themselves; the contingency is activated by loan approval or denial, not by rate fluctuations alone. And it has nothing to do with who pays closing costs; that aspect is handled separately in negotiations or the contract.