What is a mortgage contingency?

This clause in a real estate contract protects the buyer when they can’t get loan financing for their new home.

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Elissa SuhSenior Editor & Disability Insurance ExpertElissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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When you buy a home, unless you’re making a cash transaction you’ll most likely finance your house, which means taking out a mortgage and paying the lender back over time. But what happens if you sign a contract, and then can’t get the proper financing? Having a mortgage contingency clause in your real estate contract will let you walk away from the purchase with no penalty. While this provision is meant to protect the buyer, some may choose to waive it.

What is a mortgage contingency?

Your real estate contract typically includes a few contingency clauses, or provisions that need to be met or events that must occur to make the contract binding. Contingent means conditional or dependent on, so in this case the sale and purchase of the house is contingent — or dependent upon — the buyer successfully getting a mortgage that fulfills the approved and decided upon details and terms. More on that next.

Another common clause is the appraisal contingency, which means the home purchase hinges on the house being valued at or above a specified amount.

What goes in a mortgage contingency clause

The buyer and seller negotiate the terms of the mortgage contingency. While there is no standard agreement, a loan contingency should provide details about the lending terms including:

  • The specific dollar amount or how much the buyer should be approved for.

  • The interest rate. It’s important to specify a number or range so you’re not cornered into committing to a high interest rate mortgage that you cannot afford.

  • Any closing fees and mortgage points

  • Mortgage contingency date or how long the buyer has to secure a loan. The mortgage contingency date is usually 30 to 60 days from the execution of the contract.

  • Mortgage contingency extension. You can work in the terms of an extension with the seller, in case you are not able to get a loan by the contingency date.

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How a mortgage contingency works

Once you do find your dream house, you’ll sign the purchase agreement and put down an earnest money deposit — also known as a good faith deposit — to let the seller know you’re serious. Usually 1% to 5% of the purchase price, the earnest money will ultimately be applied to the payments toward your new home once the purchase is finalized.

Next you’ll get a mortgage. Once you obtain the loan, congratulations! You’re one step closer to buying a home. You’ll provide the seller with proof in the form of a mortgage commitment letter from your lender. You can’t substitute it with a preapproval letter, since that only gives an estimate of the financing you can get and no guarantees. Getting preapproved, however, will help make getting a mortgage much easier.

In the event that you can’t qualify for a loan — maybe your lender backs out or you lose your job — or you don’t get approved for the amount you need at the interest rate you want, you can terminate the contract without losing anything. Under the mortgage contingency clause, you’ll get your earnest money deposit back and the seller will continue the search for a new buyer.

Wondering how much your mortgage payment will cost you? Try our mortgage calculator.

Waiving your mortgage contingency

Mortgage contingency clauses are generally built into the real estate contract, but some buyers may choose to waive it. Waiving your mortgage contingency means removing the clause and the protection that it carries. Why would someone want to waive their mortgage contingency? This is mostly done in a seller’s market, when demand for houses runs high.

In a competitive market, the seller may receive multiple offers and ask you to waive the contingency clause. That’s because they want to make a sale quickly, and applying for a mortgage takes time. If you want to make your offer more attractive to the seller or want to purchase the home as soon as possible, then you might consider waiving your mortgage contingency.

However, unless you’re dead certain there’s no other way you’ll get your dream house or find a better mortgage rate, you’ll be taking a risk by waiving your mortgage contingency.

If you fail to qualify for a mortgage and decide not to purchase the home, not only will you will forfeit the earnest money you paid up front, you may lose even more. The seller can sue for further losses since you are technically in breach of contract.

Tips for getting approved for a mortgage

Qualifying for a mortgage takes time, but here are a few things you can do to expedite the process.

  • Be aware of your financials. Knowing your credit score and how much you can afford ahead of time will prevent any surprises down the road.

  • Get preapproved. Again, preapproval is not the same as a guaranteed financial, but it can prepare you for the next steps and help you get better rates.

  • Hold off on new career moves. Any sudden changes to your income stream may cause lenders to reevaluate your financial security.

  • Use a reputable lender. Do your research and ask your real estate agent or financial planner to help you find the right lender.

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