What Is a Mortgage Contingency & How Does It Work?
Understand the mortgage contingency: a critical real estate clause designed to protect homebuyers throughout the purchase.
A mortgage contingency is a protective measure within a real estate purchase agreement. This clause makes a home purchase dependent on the buyer’s ability to secure a mortgage loan. Its purpose is to allow buyers to withdraw from a transaction without financial penalty if they cannot obtain the necessary financing.
If a buyer signs a contract and cannot secure financing, this contingency allows them to cancel the agreement and typically receive their earnest money deposit back. This provides a crucial safeguard, offering peace of mind by mitigating the financial risk associated with committing to a home purchase before loan approval is finalized.
Core Elements of a Mortgage Contingency
A mortgage contingency clause defines specific conditions for satisfactory financing. These elements outline the financial parameters and timelines agreed upon by both the buyer and seller. A primary component is the specific loan amount or percentage of the purchase price the buyer intends to finance. This detail establishes the financial scope of the buyer’s loan application within the transaction.
The clause also specifies the type of financing the buyer will pursue, such as a conventional, FHA, or VA loan. This ensures alignment between the buyer’s loan strategy and the seller’s expectations regarding the transaction. A maximum interest rate the buyer is willing to accept is another common inclusion, preventing the buyer from being forced into a loan with unaffordable terms.
A contingency period or deadline, typically 30 to 60 days, is also a standard element, within which the buyer must secure a loan commitment. The clause may also outline required approvals, such as a satisfactory appraisal or underwriting, which are conditions for the lender to finalize the loan.
Navigating the Contingency Period
Once a purchase agreement with a mortgage contingency is signed, the buyer begins securing financing within the specified timeframe. This process starts with the buyer submitting a loan application to a lender. The application requires financial documentation, including income verification, asset statements, and credit history.
Throughout the contingency period, communication between the buyer, lender, and sometimes the seller’s agent is important to monitor loan status. The buyer must respond promptly to any requests for additional information or documentation from the lender to avoid delays. Lenders typically initiate an appraisal to ensure the property’s value supports the loan amount, and the loan application proceeds through underwriting. All steps must be completed within the contingency timeline for final approval.
The goal during this period is to secure a “loan commitment,” which is the lender’s formal agreement to provide the mortgage. This commitment is a binding offer, contingent upon final verification and closing conditions. Buyers must diligently pursue their financing to obtain the loan as stipulated in the contract. Obtaining this commitment within the agreed-upon period fulfills the mortgage contingency.
Resolving the Contingency
The conclusion of the mortgage contingency period has several possible outcomes. If the buyer obtains a loan commitment that aligns with the terms specified in the contingency within the allotted time, the contingency is considered met. The buyer typically provides written notification to the seller that the financing condition has been satisfied, removing the contingency and allowing the transaction to move closer to closing.
Conversely, if the buyer is unable to secure a loan commitment within the stipulated terms or timeframe, the contingency is not met. The mortgage contingency clause allows the buyer to terminate the contract without penalty. This results in the return of the buyer’s earnest money deposit, which would otherwise be forfeited if they breached the contract without this protection.
Buyers can also waive the contingency, proceeding with the purchase without securing financing. This carries substantial financial risk, including the potential loss of their earnest money. Alternatively, a buyer may request an extension of the contingency period from the seller if more time is needed. Any such waiver or extension typically requires written agreement from both parties.