What is a Mortgage Contingency?
Think of a mortgage contingency as that rogue, spare napkin in your glovebox. Hopefully, you won’t need it, but what’s the point of throwing out what could be useful later, right? A mortgage contingency is a clause in a real estate contract that protects both the buyer and the seller if loan financing were to fall through.
Life happens, and our plans never really go as they seem. The contingency clauses that exist within your typical real estate transaction are there to protect you and your finances through a variety of circumstances. It’s not unlikely to have a clause in place to ensure the home passes the required inspections, the house meets the appraisal value, and so forth, and so on.
The word contingent means conditional or dependent on. So, in the case of a mortgage contingency, the transaction is dependent on the buyer receiving the financing they need. There’s no “standard agreement” when it comes to a loan contingency. However, the contingency should provide details about:
- The size of the loan the buyer should be approved for
- The interest rate of the mortgage
- Closing fees
- Mortgage contingency date (or how long the buyer has to secure the loan)
IMPORTANT NOTE: The mortgage contingency date is typically 30 to 60 days after the execution of the contract. If the buyer cannot obtain financing within this period, they risk losing their earnest money deposit, and the sellers are legally allowed to cancel the contract.
How a Mortgage Contingency Works
Now that you know what a mortgage contingency is, let’s talk about the clause in action. As always, we recommend meeting with a lender before ever stepping foot into an open house. Knowing just how much home you can afford will increase your buying power while letting the sellers know that you’re serious about making an offer.
But let’s say you find your dream house first and put down an earnest money deposit to let the seller know you’re interested. This deposit doesn’t go straight to the seller’s pockets, though. These funds are deposited into an escrow account set up through your title company. When your housing transaction closes, the money is then put toward your down payment and closing costs.
In the unfortunate event that your finances change or you’re unable to qualify for the rate you wanted, your mortgage contingency will protect you. Under this clause, you can terminate the contract without losing your earnest money deposit, and the seller may resume searching for a new buyer.
Removing the Contingency
All contingencies have a deadline in which each one must be removed, either as an active or passive removal. An active removal happens when the contractual parties are notified in writing as soon as the condition is met. (For example, if you inform the seller of your home loan approval, an active removal would occur.) A passive removal assumes a condition has been met when a deadline has passed.
It’s essential to note that removing a contingency is not the same thing as waiving it. In some cases, buyers may feel pressured to remove contingencies to make their offer seem more attractive, especially in a seller’s market. This puts you at risk of losing your deposit and causing more trouble for the seller. According to Better, waiving a mortgage contingency also gives the seller grounds to sue you for breach of contract or financial setbacks because they took their home off the market for you.
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