Is the buyer obligated to buy the property even if they can’t get a loan?

QUESTION: In the updated Offer to Purchase and Contract (Form 2-T), there is a new “Note” under paragraph 4(a) that says: “NOTE: Buyer’s obligation to purchase the Property is not contingent on obtaining a Loan. Therefore, Buyer is advised to consult with Buyer’s lender prior to signing this offer to assure that the Due Diligence Period allows sufficient time for the appraisal to be completed and for Buyer’s lender to provide Buyer sufficient information to decide whether to proceed with or terminate the transaction.”

My buyer-client is very confused and worried about this note, because they cannot afford to buy the home without a loan. So, in their eyes, the contract is contingent on their obtaining a loan. What does this note mean and what should I tell them?

ANSWER: This note has been part of Form 2-T for many years. The reason it probably seems new is because when the forms were updated last year, notes like this one were placed in a new bright blue box to help them stand out better. Warnings were also placed in new bright red boxes to help alert consumers to important issues.

The purpose of the note under paragraph 4(a) is to make clear that the buyer is obligated to purchase the property regardless of where the buyer obtains funds. As a legal matter, Form 2-T simply states that the seller promises to sell and the buyer promises to buy on the conditions set forth in the contract. The note under paragraph 4(a) means that the ability of a buyer to obtain a loan is not a condition of the contract that will relieve the buyer of their promise to buy. In other words, the transaction will not automatically blow up just because the buyer cannot obtain a loan. The transaction will proceed until the deal either terminates or closes.

All is not lost for your client, however. You should tell your buyer that the contract gives them the right to terminate the transaction, without penalty, during the Due Diligence Period. If they are not confident that they will be approved for a loan, they can terminate the transaction during that time and receive a refund of their Earnest Money Deposit. If your client has not already received preliminary loan approval, you should advise them to ask for a Due Diligence Period that will allow them to complete the initial loan approval process. If, following the end of the Due Diligence Period, the buyer is unable to complete the purchase because they can’t get a loan, they risk losing their Earnest Money Deposit since the contract does not contain a loan contingency.

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