FAR BAR Financing Contingency Explained

Florida FAR BAR As-Is Contract Financing Contingency

The Florida Association of Realtors (FAR) and the Florida Bar Association (FAR/BAR) have created standardized real estate contracts used commonly in Florida. These include provisions and contingencies for various aspects of a real estate transaction, including financing, inspection, and appraisal.

Little known fact:  Did you know that a buyer who is denied a loan, tries to get approval, and does not tell the seller about the denial for several days, could be at risk of losing their deposit if they later try to cancel the contract during the financing contingency?  It’s true.  Find out in this article…

The Florida FAR/BAR Contract financing contingency Paragraph 8, is the single most frequently called upon a topic I get.  I scoured the Florida Association of Realtors (FAR) materials, cases, and the contract, and came up with the following:

Florida FAR BAR Contract As-Is, Paragraph 8, Important points:

• Loan Approval, use the defined time “Loan Approval” (capital “L” capitol “A”) in any addendum; Line 87.  Makes sure you use the defined term in any addendums.  
• The buyer is under a duty to give the seller prompt notice of Loan Approval or denial.  So if a buyer sits on approval or denial for a few days, the seller could claim a breach and make a deposit claim.  Line 103.
  • Important: Buyers don’t have to give sellers a copy of the actual “loan commitment” or “loan denial” letter.  “Written notice” of Loan Approval or denial is sufficient.  Line 103.  The contract authorizes direct communication between the seller and seller’s agent, and lender.  
• Once the buyer communicates Loan Approval to the seller, the buyer is under a duty to close and shall lose their deposit unless:
  • Seller defaults on the contract.
  • Property-related conditions of the Loan Approval have not been met (unless waived).  This typically involves the seller’s duty to fix something under an addendum, and the seller does not perform.  
  • The lender’s appraisal value was not sufficient to meet the lender’s Loan Approval terms.
    • However, the case of Lefont says; that buyers must close even if the property underarraises if they fail to give notice of loan approval or denial.  It is critical that the buyer applies for the loan stipulated to in the contract.  It is not clear however if the proper loan was applied for, and the buyer did not give notice of the approval, would the buyer be locked in. 
• If the buyer does not give notice of Loan Approval the contract says the buyer obtained a loan and the deposit is nonrefundable to the buyer.
  • Important; in this event, the seller can cancel the contract within 3 days of the expiration of the Loan Approval Period; Line 93.
• The buyer has a duty to use “diligent effort” to pursue the loan.  For example, if the buyer is slow to respond to lender requests for employment or financial information, the seller could claim the buyer is in default of the contract; Line 95.
  • Important: if an unresponsive buyer tries to cancel the contract for loan denial, the seller could claim a “buyer default”, and claim on the deposit.   
• The buyer has a duty to timely communicate the status of the loan to the seller. A  Buyer who fails to do this could be the victim of seller’s breach of contract claim, which are a potential problem if buyer later wants to cancel the contract and get a deposit refund.  Line 99.
• hugely important; Loan Approval that is conditioned on the sale of another property belonging to buyer, is not “Loan Approval” as defined by the Contract; Line 93
  • So if the buyer gives seller a loan approval that has a contingency for sale of another property belonging to buyer, its the same as not giving a loan approval at all, and seller can cancel the Contract.  I’ve seen this happen in real life when buyer’s agent was sure the loan was ceraint, seller cancelled, and levered another $15k out of the buyer to reinstate the contract.    
  • Many buyer’s agents only give a letter from buyer saying they got their loan to avoid these complications.  
• Use sale of buyer’s property addendum if buyer wants to avoid closing if they cant sell their current home; Line 93.
• Buyer must give written notice of loan denial if they want to cancel.  If no notice of loan denial is given, the buyer is deemed to have gotten the loan.
  • Important: Loan denial does not have to be a “denial letter” from lender.  It can simply be an email from buyer saying they were denied the loan.
  • Remember, the contract authorizes direct communication between seller and seller’s agent.  Line 100.
  • A seller’s agent that suspects foul play can write an email to the lender directly (and cc buyer’s agent) and ask if the buyer was denied the loan.  Lenders will not likely lie for buyers.  

What Happens If Appraisal Contingency Expires

The appraisal contingency specifically allows the buyer to cancel the contract or negotiate a lower purchase price if the home does not appraise at or above the purchase price. It protects the buyer from overpaying for the property, and it’s particularly crucial if the buyer is obtaining financing because lenders typically won’t lend more than the appraised value of the property.

If the appraisal contingency period has expired in a FAR/BAR contract, then the following may happen:

1. Loss of Protection: After the expiration, the buyer can no longer back out of the contract based on a low appraisal without potentially losing their earnest money deposit. The buyer loses the ability to renegotiate the price based on a lower appraisal value.
2. Risk for the Buyer: The buyer might have to cover the gap between the appraised value and the agreed-upon purchase price, especially if they’re getting a loan, since the lender would only finance up to the appraised value.
3. Proceed with the Contract: If the buyer still wants to proceed with the contract despite a low appraisal, they’ll need to make up the difference, often out of pocket. This could mean more upfront cash at closing.
4. Possibility of Dispute: If the buyer wants to cancel the contract despite the expired contingency, it might lead to disputes, and potentially even litigation, if the seller refuses to return the earnest money deposit.

Remember, this is a general overview. The exact implications would depend on the specific terms in the contract, as well as Florida’s state laws. Always consult with a legal professional when dealing with complex real estate transactions.

Additional Thoughts: 

• The diligent seller’s agent stays in touch with the lender in writing and keeps the buyer’s agent cc’d on the emails.  
• Appraisers are restricted to only communicating with the party that ordered the appraisal whose name appears in writing in the appraisal order.  
• One difficult question is if during the loan approval period the buyer gives notice of loan approval and then loan denial, can the buyer cancel the contract?  Although I could not find any great rules on the issue, it’s been my experience we have always been able to recover the deposit for the buyer.  
• Realtors should only communicate the position of the buyer.  So you want to get an email from the buyer that says they were approved, or not approved for the loan, and then communicate to the seller’s agent after that.  
• Relators communicating that their buyer did or did not get a loan without an email from the buyer is not a good idea.  
• If the buyer does not get their loan and wants to cancel, send a cancelation signed by the buyer.  
• If the loan approval is conditioned on the sale of other property, you want to educate your buyer on what that means 

Written and Reviewed on June 21st, 2021 by James N. Brown, Esq. The form reviewed was the Florida Realtors Florida Far Bar As-Is Rev. 4/17/2017.