Quick answer
A financing contingency makes a home purchase conditional on the buyer securing a mortgage.
| Element | Typical terms |
|---|---|
| Duration | 21 – 30 days from mutual acceptance |
| What it protects | Buyer's earnest money |
| Who benefits | The buyer |
| What triggers it | Loan denial, appraisal shortfall (if combined), or inability to obtain terms specified |
| If it fails | Buyer terminates and recovers earnest money |
| If waived | Buyer risks losing earnest money if financing fails |
In Washington State, the financing contingency is addressed in Form 22A of the NWMLS purchase and sale agreement.
How a financing contingency works
When a buyer's offer is accepted, the clock starts on several contingency periods running in parallel. The financing contingency is typically the longest.
The sequence:
- Mutual acceptance. Both parties sign. Contingency periods begin.
- Loan application. The buyer formally applies, usually within a few days. Form 22A commonly specifies a deadline.
- Processing and underwriting. The lender verifies income, assets, employment, credit, and the property itself.
- Appraisal. The lender orders an independent appraisal to confirm the property supports the loan amount.
- Loan approval or denial. The lender issues a decision.
- Contingency satisfied or terminated. If approved, the contingency is waived or expires. If denied within the period, the buyer may terminate.
The critical detail: the protection only exists during the contingency period. Once it expires — whether the loan is approved or not — the buyer's earnest money is at risk.
What the contingency actually covers
A financing contingency typically specifies the loan terms the buyer must be able to obtain:
- Loan type (conventional, FHA, VA, jumbo)
- Loan amount or maximum loan-to-value ratio
- Maximum interest rate the buyer is obligated to accept
- Maximum points or fees
- Loan term (typically 30 years)
If the buyer cannot obtain a loan meeting those specifications, the contingency is triggered.
Why the rate cap matters: without a maximum rate specified, a buyer could theoretically be obligated to accept a loan at any rate a lender offers. Specifying a ceiling protects against a rate spike between acceptance and closing.
Financing contingency vs. appraisal contingency
These are related but distinct, and confusing them causes problems.
Financing contingency: protects against the buyer being unable to obtain a loan at all.
Appraisal contingency: protects against the property appraising below the purchase price.
They interact. If a home appraises low, the lender will only lend against the appraised value, which can create a financing shortfall. But they are separate protections and can be waived independently.
A buyer can waive the appraisal contingency while keeping the financing contingency, which means they commit to covering any appraisal gap with cash but still retain protection if the loan is denied for other reasons — employment change, credit issue, debt-to-income problem.
This is a common and often sensible middle position in competitive markets.
Why financing falls through
Roughly 5 to 10 percent of pending transactions do not close. The most common financing-related causes:
Employment change. Lenders re-verify employment shortly before closing. Changing jobs, going from salaried to contract, or losing a job between application and closing can disqualify a loan.
New debt. Financing a car, opening a credit card, or making a large purchase on credit changes the debt-to-income ratio. Lenders re-pull credit before funding. This is one of the most common preventable causes.
Credit score drop. A late payment, a collection, or a large balance increase can move a borrower below a program threshold.
Appraisal shortfall. The property appraises below the contract price and the buyer cannot or will not cover the gap.
Property condition. FHA and VA loans have property standards. Significant deferred maintenance, health and safety issues, or structural problems can make a property ineligible.
Condo project ineligibility. For condominium purchases, the lender must approve the project as well as the borrower. Inadequate reserves, low owner-occupancy, or pending litigation can disqualify an otherwise well-qualified buyer.
Undisclosed liabilities. Child support, tax liens, or other obligations discovered during underwriting.
Should a buyer waive the financing contingency?
In competitive markets, buyers are frequently advised to waive contingencies to strengthen an offer. This deserves careful thought.
Waiving the financing contingency means: if your loan is denied for any reason, you either close with cash or lose your earnest money — commonly 2 to 5 percent of the purchase price. On an $900,000 home, that is $18,000 to $45,000.
Waiving may be reasonable if:
- You have full underwritten pre-approval, not just pre-qualification
- Your lender has reviewed all documentation and issued a conditional commitment
- You have sufficient liquid reserves to close with cash if necessary
- Your employment and income are stable and verifiable
- The property type is straightforward (not a condo with project-approval risk)
Waiving is generally unwise if:
- You have only a pre-qualification letter
- Your income is variable, commission-based, or newly self-employed
- You are purchasing a condominium where project eligibility is uncertain
- You do not have reserves to cover a failed loan
- You have recently changed employment
A stronger alternative: obtain a fully underwritten pre-approval before writing offers. Many lenders will complete underwriting on the borrower before a property is identified. An offer backed by full underwriting with a short 10 to 14 day financing contingency is often as competitive as a waived contingency, with far less risk.
What sellers should look for
When evaluating offers, the financing contingency is one of the most important terms after price.
Signals of a strong financing position:
- Fully underwritten pre-approval rather than pre-qualification
- Larger down payment (20 percent or more)
- Shorter contingency period (10 to 14 days rather than 30)
- Conventional financing rather than FHA or VA, which carry additional property requirements
- A local lender with a track record of closing on time
- Buyer's agent who can speak specifically to the buyer's qualifications
Questions worth asking through your agent:
- Has the lender completed underwriting, or only a credit pull?
- What is the buyer's down payment source, and is it seasoned?
- Has the buyer been employed in the same position for at least two years?
- Is the lender local and reachable?
A cash offer 2 percent below a financed offer is often the better choice depending on your timeline and risk tolerance. Certainty has value.
Timeline in Washington State
Typical Washington residential transaction using NWMLS forms:
| Milestone | Typical timing |
|---|---|
| Mutual acceptance | Day 0 |
| Earnest money deposited | Within 2 business days |
| Loan application | Within 3 – 5 days |
| Inspection contingency | 5 – 10 days |
| Appraisal ordered | 7 – 14 days |
| Appraisal received | 14 – 21 days |
| Financing contingency expires | 21 – 30 days |
| Final underwriting approval | 25 – 35 days |
| Closing | 30 – 45 days |
Cash purchases can close in 7 to 14 days since no financing steps are required.
What happens if the contingency is triggered
The buyer must provide notice. Simply failing to obtain financing does not automatically terminate the contract. The buyer typically must deliver written notice of termination within the contingency period, often accompanied by documentation such as a loan denial letter.
Earnest money is released. Both parties normally sign a mutual release instructing escrow to return the earnest money to the buyer.
If the parties disagree, escrow holds the funds until the dispute is resolved by agreement, mediation, arbitration, or court, depending on the contract terms.
Deadlines are strict. Missing the notice deadline by even a day can forfeit the protection. This is one of the most consequential dates in the transaction.
Common questions
What is a financing contingency? A clause making a home purchase conditional on the buyer obtaining a mortgage. If financing is denied within the specified period, the buyer can terminate and recover earnest money.
How long is a typical financing contingency? Twenty-one to 30 days from mutual acceptance in most Washington transactions. Competitive offers sometimes shorten it to 10 to 14 days.
Can a seller reject an offer with a financing contingency? Yes. Sellers may accept or reject any offer for any lawful reason. In competitive situations, offers with fewer contingencies are often preferred.
What is the difference between pre-qualification and pre-approval? Pre-qualification is an informal estimate based on stated information. Pre-approval involves verification of income, assets, and credit. Fully underwritten pre-approval goes further, with an underwriter reviewing the complete file. Only the last provides real certainty.
Do cash offers have financing contingencies? No. Cash buyers have no loan, so no financing contingency applies. Cash offers typically include proof of funds instead.
Can I waive the financing contingency and still get a loan? Yes — waiving the contingency does not mean paying cash. It means you lose the contractual protection if the loan fails. You still pursue financing; you simply accept the risk.
What happens to earnest money if financing falls through after the contingency expires? The seller may be entitled to retain it, depending on the contract terms. This is the primary risk of waiving or letting the contingency lapse.
Get your financing sorted before you write offers
The single most useful thing a buyer can do in a competitive market is obtain a fully underwritten pre-approval before house hunting. It shortens your contingency period, strengthens your offer, and dramatically reduces the chance of a failed transaction.
At Tribeca NW, we work with local lenders who understand this market and can complete underwriting in advance. If you would like a referral, we are happy to make one.
Talk to a Tribeca NW buyer's agent →
Related reading: What is a contingency in real estate? → | What does contingent mean in real estate? → | The step-by-step home buying process in Washington State →
This article is general information, not legal or financial advice. Contract terms vary. Consult your agent, lender, and attorney regarding your specific transaction.
Tribeca NW Real Estate serves buyers and sellers across Bellevue, Kirkland, Redmond, and the greater Puget Sound region. 1,675 homes closed. $1B+ in volume. 875+ five-star reviews.
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