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What is a Mortgage Contingency Agreement or Clause?

Locking the door of a home

When you find the home of your dreams, it’s time to make your offer in what’s called a purchase agreement or contract. A large part of that contract is tied to the home’s sales price and financing.

Along the same line, your contract often includes additional contingencies or conditional elements (outside of financing) that must be met by a specific deadline for the contract to be fulfilled.

If you waive any of these elements, can you save time or money? Let’s review what contingencies are and which should be left untouched.

What is a mortgage contingency clause?

A mortgage contingency clause, also known as a finance contingency, gives the buyer a certain amount of time to secure a mortgage after contract execution. It basically acts as a layer of protection.

If you, as the buyer, are unable to secure a mortgage within the specified timeframe, then you can walk away from the transaction and get your earnest money back.

You may think it’s unlikely to happen to you if you’ve secured mortgage pre-approval. Unfortunately, you’re wrong. Sometimes a mortgage underwriter finds a problem with the application. Maybe your credit has changed, you switched jobs, or even lost employment. This results in loan denial, and yes — believe it or not — It can occur after receiving mortgage pre-approval. However, with a mortgage contingency in place, you have a way out of the contract, and the home can go back on the market.

How long does a mortgage contingency clause last?

It all starts with a timeline as decided upon by you and the seller. This typically falls within 30 and 60 days during which you will be obtaining mortgage approval. There is padding involved because you may be required to provide additional documentation during the mortgage process.

What if I need more time?

You can request an extension from the seller, but it could cost you additional earnest money to show them you’re serious about buying.

Can I waive a mortgage contingency to speed up the process?

You can waive a mortgage contingency. In red-hot markets, sellers prefer offers that have the fewest contingencies. The mortgage or finance contingency, though, is not one you should take likely. If your financing was to fall through, you could lose your earnest money deposit in addition to the property. Depending on what state you live in, you could also be looking at a lawsuit for breach of contract.

Other contingencies in a real estate transaction

Appraisal contingency

The house must appraise at the sale price or higher. If not, you may not be able to secure a mortgage, and the deal cannot close. Or, if you can obtain a loan, it will have to be at the appraised value. If the house appraises for $340,000 instead of $350,000, you would have to bring in an extra $10,000 to the table in addition to your down payment and closing costs.

Inspection contingency

The house must pass the inspection. If not, and you are not interested in a concession, you can void the contract.

Existant home sale contingency

If you’re buying and selling at the same time, you’ll likely need to keep this contingency near the top of your list. It’s often necessary for you to complete your home sale before you can finance a new home.

While mortgage contingencies can be a safety net, they can also work against you. If you’re looking to buy in a seller’s market, you’re up against a lot of offers. Your contingent offer won’t be the most appealing if there are too many contingencies tied to it. Enlist the help of a trustworthy realtor to ensure you’re writing a competitive offer that will be noticed.

Do you have more questions about loan contingencies? Let one of our salary-based mortgage consultants help. Call (800) 910-4055 or schedule an appointment.