Why Your Financing Contingency Should Be Based on the Buyer’s Subjective Satisfaction

When purchasing real estate, buyers often focus on price, inspections, and closing timelines. But if your purchase involves financing, one of the most critical—and frequently misunderstood—protections in the contract is the financing contingency.

Not all financing contingencies are created equal. In fact, the specific wording of this clause can determine whether a buyer can walk away from the deal without penalty if the loan terms are not favorable. The key distinction is whether the contingency is based on objective approval or subjective satisfaction of the buyer.

Objective vs. Subjective: Why It Matters

A typical contract may say the buyer’s obligation is contingent upon obtaining financing. But unless the agreement clearly states that the financing must be “subjectively satisfactory to the Buyer,” the seller may argue that any loan approval—no matter how unfavorable—satisfies the contingency.

What is an Objective Standard?

An objective financing contingency requires only that the buyer receive a financing commitment that meets general criteria (loan amount, type, etc.).Under this interpretation, if a lender issues an approval—even with:

• a much higher interest rate than expected,

• excessive fees,

• unfavorable repayment terms, or

• conditions that materially burden the buyer,

…the seller could claim the buyer is contractually obligated to move forward.

This can leave a buyer legally stuck with a loan they do not want and did not anticipate.

What is a Subjective Standard?

A financing contingency based on the buyer’s subjective satisfaction gives the buyer the exclusive right to determine whether the financing terms are acceptable. This language typically includes wording such as:“…contingent upon Buyer obtaining financing on terms subjectively satisfactory to Buyer in Buyer’s sole discretion.”

Under a subjective standard:

• The buyer decides whether the rate, fees, and conditions are acceptable.

• The buyer may terminate the contract if the loan terms do not meet their expectations.

• The seller cannot challenge the buyer’s evaluation of the loan terms.

This gives the buyer maximum legal protection and eliminates ambiguity.

Why Sellers Push Back—and Why Buyers Shouldn't Give In

Because subjective standards provide broad protection for buyers, some sellers or agents prefer more restrictive language. Buyers should understand that removing subjective language greatly increases their risk.

In a competitive market, it is tempting to accept whatever form contract is provided. But the consequences of an improperly drafted financing contingency can be severe—especially when interest rates or lending conditions are volatile.

Common Buyer Misconception

Many buyers assume that if the lender offers a loan with terms they don’t like, they can simply walk away. Not true.

Unless the contract is drafted properly, a seller can argue that the financing contingency has been met—and that the buyer’s refusal to proceed constitutes a breach.

A Few Words Can Protect Your Entire Deal

Financing contingencies are not “fill-in-the-blank” provisions. They are legal risk-allocation tools. A single sentence can determine whether a buyer retains meaningful exit rights or is forced into a transaction under punitive loan terms.

Before you sign a purchase agreement—especially when financing is involved—have an experienced real estate attorney review the contract. Precision matters, and a few minutes of review can prevent significant financial exposure.

Disclaimer:

This post is for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney–client relationship. Real estate laws and contract requirements vary by jurisdiction, and you should consult a qualified attorney regarding your specific situation.