We do not recommend writing “Market Rate” into the Specified Financing provision of any of the Financing Contingencies. First, “Market Rate” is undefined; it is unclear exactly what that term means and on which date it applies to – does it refer to the “Market Rate” on the date the offer was made, on the date of Ratification, or by the Financing Deadline? Further, it is unclear to whom the term applies, as the “Market Rate” is different for each person. The interest rate a borrower qualifies for can vary depending on an individual’s financial information, credit score, debt to income ratio, etc. This creates an ambiguity in material term of the contract that could prevent ratification or at least frequently leads to conflict down the road, often involving lawyers and litigation costs.

We recommend including a specific interest rate in the Specified Financing as this protects both the Seller and the Buyer while ensuring they are on the same page at ratification. The financing contingencies are primarily intended to protect Buyers from Default if they are not able to secure a loan necessary to complete the purchase. However, including a specific interest rate can also protect the Seller. If the agreed-upon interest rate is too low in relation to the market, the loan product may not be available, in which case the Buyer can obtain a written lender rejection letter and Void the Contract. On the other hand, if the agreed-upon interest rate is too high, the Buyer may not be able to afford the monthly payments and they can Void the Contract by obtaining a written lender rejection letter.

Therefore, if the Seller accepts an offer with a financing contingency, we recommend that the parties insert the interest rate that the Buyer is pre-approved or pre-qualified for, plus some leeway, such as a a quarter to a half percentage point in the event that the available interest rates fluctuate post-ratification.