The pitfalls of the financing proviso

by | Nov 13, 2022 | Purchase realtor

When buying the home, the buyer usually takes a “reservation of financing. This simply means, then the buyer can get out from under the sale if he does not get a mortgage loan. In practice, buyers often take this too lightly. In this article, we’ll explain to you where the pitfalls of the financing reservation are.

The buyer of a home has an obligation of effort to obtain financing. This means that he must make reasonable efforts to secure financing.

In most cases, it is included in the purchase deed, that the buyer must be able to provide 1 rejection letter from the bank stating that financing will not be provided to him.

Pitfall 1 – the documentation requirement

Where it often goes wrong is the documentation requirement. As a buyer, you should allow the seller to show how you made an effort. How you do this, there are no set rules for that (it is “form-free”). So makes sure that as a buyer you can demonstrate communication in which you have been busy applying for a mortgage loan. For home sellers, it is good to know that this is there. Suppose the buyer dissolves the home and you find out that he was able to get a rejection letter from the bank simply by quitting his job. Then, as a seller, you can strongly question the buyer’s duty of effort, and you may then be able to legally demand fulfillment of the agreement after all.

Pitfall 2 – amount of the money loan

Suppose you buy a house for €500,000. You wanted to make your bidding more attractive to the sellers, and that’s why you limited the financing hold to €300,000. Indeed, in a worst case scenario, you can borrow €200,000 from your parents. Now you apply to the bank for the money loan of the full amount of €500,000 and the bank refuses to give you the loan. The bank’s rejection letter says that they are not going to give you a mortgage loan in the amount of €500,000. This will NOT allow you to successfully rescind the sale. After all, the seller does not have to agree to this, since it was agreed that the reservation of financing would be for a maximum amount of €300,000 and not €500,000. So you will have to apply for a mortgage loan somewhere for €300,000 and get a rejection letter based on that amount. Has the term of the financing reservation already expired? Then you are stuck with the purchase and will MUST take delivery on the agreed delivery date (key transfer date) or else pay a penalty of 10% of the purchase price.

Pitfall 3 – extra pieces

In many cases, there is an agreement in the bill of sale that more documentation will need to be submitted in addition to a bank’s rejection letter. This is often the filed application for the money loan with the bank in which you are applying for the money loan and possibly the income information based on which the money loan was applied for and or inspection of your equity. For example, such an article might look like this:
“In addition, the parties agree that the buyer must submit the following document(s) to satisfy the “well-documented” requirement: one rejection from a recognized lending banking institution + the signed application form of the requested mortgage as well as the income information that was the basis for the requested mortgage.”

Make sure you do not read over this, because if you do not send the agreed documentation complete in your rescission, then you cannot rescind the sale.

Pitfall 4 – an additional rejection letter

Here is another example of how the reservation of financing can be in the deed of sale:

If Buyer wishes to invoke dissolution as a result of the (timely) lack of financing as referred to in Article 18.1 subsection 1, unless the parties agree otherwise, “well documented” shall mean one rejection from an approved lending banking institution must be presented to Seller or Seller’s broker.

In addition, the parties agree that Buyer shall produce the following document(s) to satisfy the “well documented” requirement: one rejection from a recognized lending banking institution + the signed application form of the mortgage applied for as well as the income information that formed the basis of the mortgage applied for.”

In fact, as a buyer, you have now committed yourself to being able to produce not one, but TWO rejection letters. Indeed, the article speaks of “one rejection” with “one rejection” in the supplement as well. That’s TWO rejections in all.

Pitfall 5 – extension of financial reservation

It may happen that more time is needed to complete the financing and therefore, for example, 1 week of postponement is requested. For example, it may have been agreed that the financial reservation runs through Tuesday, Nov. 1, 2022. An extension was then granted by email until Tuesday, Nov. 8, 2022.

The bill of sale often includes this article under the reservations section:

“The party invoking rescission shall ensure that the notice that rescission is invoked is received by the other party or his broker no later than the first business day after the date referred to in the relevant resolutive condition.”

This means that in the first instance, the rescission should have been invoked in writing no later than 1 business day after Tuesday, Nov. 1, along with all agreed documentation (rejection letter, etc.). So that’s on Wednesday, Nov. 2, 2022. The moment you get a week’s postponement, because is it not automatically the case that this extra business day in which you can cancel is also included. That depends on how clearly this is described in the written extension given by the selling party. This can result in a nasty legal conflict. So always be sure to call for rescission on time no later than the last day of the extension (in this example, that is Tuesday, Nov. 8, 2022) and thus play “safe.

A sample email requesting deferred funding can be found here.

Pitfall 6 – bank guarantee / deposit

When deferred financing reservations are issued, it is often forgotten to include the date of the bank guarantee/security deposit as well. This leads to the notary going to issue a notice to you and also to the selling party at the time the security deposit is not received. You are then not abiding by a contractual agreement in the deed of sale.

A sample email requesting deferred funding can be found here.

Pitfall 7 – don’t get too rich as a salesperson

Then a trap for sellers who already count themselves rich when buyers can no longer rescind and get a mortgage loan. Basically, this costs the buyers 10% of the purchase price as a penalty that benefits the sellers. But buyers can petition the court to “mitigate” this fine. An individual with a genuinely pathetic story can usually successfully appeal for mitigation of the fine. Even though the judge finds that the seller is right, he can moderate the buyer’s penalty and this moderation can even go to 100% (zero penalty).