While the purpose of the Finance Contingency is to protect the buyer in the event they are not able to obtain a mortgage, more and more the buyer is not covered all the way to the day of closing.
In a perfect world, the buyer submits an offer with a Finance Contingency that runs through the day of closing. If the buyer’s loan is rejected, the sale becomes null and void and the Earnest Money is returned to the buyer. The seller puts his property back on the market and finds a different buyer.
Finance Contingency addendums are two pages long and much more complicated than the simple explanation above, and much more dangerous to the buyer than they often expect. I have not met a buyer in 15 years who did not expect to get their Earnest Money returned if their loan is not approved. I also have not had a buyer client in 15 years whose loan was not approved 🙂
It is becoming common practice in the last few years for the seller to counter the offer by shortening the timeframe on the Finance Contingency. Often this is deemed a minor date change, when in fact it is a major change for the buyer. I have even seen buyer’s agents write offers with a 30 day escrow and a 15 day finance contingency because that is “common practice” :0
If you have a 30 day escrow and a finance contingency that expires in 15 days, you are not likely covered if the loan is rejected on the 23rd day. You are also not covered if you did not apply for your loan on time or if you did not submit the documents to the lender in a timely manner.
VERY IMPORTANT, you are also not covered if you do not have enough cash to close.
I am hoping the attorneys here will have something to add, or will have something on their blog explaining this further. In the meantime, suffice it to say that just because you have a Finance Contingency, that does not mean that you will automatically get your Earnest Money returned, if you can not close due to financing issues.