MY CONTRACT HAS A FINANCING CONTINGENCY, BUT DO I REALLY NEED TO DO ANYTHING?

Most residential real estate purchase contracts possess a “financing” contingency. This contingency allows the buyers to cancel the contract if they are unable to obtain financing. And, buyers are not always able to obtain financing. Sellers are not always willing to accept the excuse. Usually, this leads to a dispute with respect to who receives the earnest money.

When a contract is conditioned upon financing, Tennessee law requires the buyer to use “reasonable efforts” to obtain that financing. Whether or not a buyer used reasonable efforts is almost always a question of fact. In Wright v. Dixon, the Tennessee Court of Appeals discussed one situation and concluded that the buyer had used “reasonable efforts.” In that case, the buyer:

· Applied to four different lenders
· Spoke by telephone to one lender
· Made an application by telephone to that lender
· Provided tax returns and other information to the lender
· Was denied 100% financing because of his income level by that lender
· Applied to another lender on the internet
· Contacted and met with a mortgage broker who made inquiries to 6 or 7 other lenders
· Could not obtain 100% financing

These efforts, the court concluded, documented “reasonable efforts” to obtain financing.

The court distinguished this case from another case. In that case, the buyers made general inquiries about a loan, but waited almost 3 months to fill out an application. The testimony also included testimony from third persons that “the buyers were not concerned because they knew they could ‘get out of’ the contract.” That statement, together with the delay in making the application, doomed those buyers.

A buyer in Tennessee is not necessarily required to make more than one (1) application. In one case, the court of appeals found a buyer used reasonable efforts where she made only one application and was denied a loan due to her high debt to income ratio. In another case, the court of appeals concluded that the buyers acted reasonably by applying only to two banks. The key ingredient in those cases, and in the Wright case, was that there was no suggestion that the buyers were trying to “get out” of the contract.

The Moral of this Story: The more applications you make, the better your chances of success both in and outside of Court.

For more of this story, see Wright v. Dixon, E2010-0147-COA-R3-CV (Tenn. Ct. App. May 2, 2011).