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Mortgage contingency: What is it, how does it work and why is it important?

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    Buying a home may require additional financing and applying for a loan. However, a homebuyer might face a situation in which they sign a purchase contract but later discover the lender did not approve them for a mortgage. That's when they may want to resort to a mortgage contingency, which protects a buyer in case they are not able to qualify for a loan.

    Mortgage contingency may be able to save buyers some money and protect them from unwanted stress. For this reason, you may want to review the definition of mortgage contingency, how it works, and what it includes.

    What is a mortgage contingency and how does it work?

    A mortgage contingency is a clause in many real estate agreements that dictates the offer is contingent — or dependent — on the prospective homebuyer being able to secure a mortgage. A mortgage contingency may also be referred to as a financing or loan contingency. With a mortgage contingency in place, if the homebuyer cannot secure a loan before the time agreed on with a seller, they can walk away from the deal without the risk of getting penalized or losing their earnest money deposit.

    When a buyer is ready to commit to a specific home, they usually submit a purchase offer to the seller. In this document, they map out important details, such as the offer price, the size of the earnest money deposit and any contingencies they want to add (including a mortgage contingency). If the seller agrees to the offered terms, the parties sign a purchase agreement and the homebuyer will have a certain amount of time to secure financing from a lender.

    How long does a mortgage contingency last?

    The exact length of a mortgage contingency mostly depends on the signed purchase agreement and should be approved by both parties. Typically, you might see a mortgage contingency be anywhere between one and two months, which could potentially give the buyer enough time to secure the desired loan. In certain cases, it is possible to extend the deadline if the buyer is not able to secure the needed financing in time. However, it is up to the seller to determine that.

    What is included in a mortgage contingency?

    A mortgage contingency is not just a simple declaration that a buyer can opt out of the deal if they are unable to secure financing. Rather, it usually includes a set of conditions that must be fulfilled to proceed with the purchase and is agreed on by the buyer and seller. These are some common details you may find in a loan contingency:

    • Loan type: Among the types of loans that could be listed are FHA, conventional or VA loans. This aspect is important to mention, considering the down payment, the loan amount and the home inspection requirements, among others, may depend on it. What's more, the buyer may not want to go with a conventional loan if they believe they are able to qualify for an FHA loan or VA loan.
    • Loan amount: This is another important aspect of a mortgage contingency that may protect a buyer in case they can get approved for a mortgage but for an amount lower than needed for the specific house in question.
    • Mortgage contingency deadline: As discussed earlier, the mortgage contingency deadline helps to establish a certain timeframe and prevent sellers from waiting indefinitely for a buyer to obtain financing. It might also include information on whether an extension is possible and what the process is for it.
    • Maximum interest rate: A mortgage contingency also protects the prospective homebuyer by letting them choose an interest rate they can afford and are comfortable with. If it's higher than expected and stated in the clause, they may be able to pull out of the deal without consequences.
    • Closing costs and origination fees: An origination fee is a percentage of the total loan amount charged by the lender to cover the processing and funding costs. Similarly, a buyer can determine their acceptable maximum.

    Can you waive a mortgage contingency?

    A homebuyer can usually remove or omit a contingency if they choose. There are a few reasons why waiving a mortgage contingency might seem appealing to certain buyers. Examples include if a buyer pays fully in cash (and does not even apply for a mortgage), if they’re certain they will be able to obtain financing or if they’re trying to make their offer seem more competitive to a seller.

    In some cases, a mortgage contingency is not necessarily needed and would not make much of a difference for homebuyers. However, they may want to be aware that waiving a mortgage contingency could prove risky. In some cases, even preapproved mortgages can fall through, for example, because of a change in the buyer's circumstances.

    In summary

    A mortgage contingency is a safety measure in the agreement that lets the buyer back out of the deal, primarily when they are unable to secure the expected financing for the purchase. Just like other contingencies related to home purchases, it is designed to protect homebuyers from losses and helps strike a fair deal (or walk away without penalties otherwise).

    Mortgage contingency FAQs

    1. What other types of real estate contingencies are there?

    Both the buyer and seller can add contingencies to the agreement that can apply to a variety of different things. Some of the more common examples of real estate contingencies are insurance, appraisal, home sale and title.

    2. What is contingency removal?

    Contingency removal, also called contingency release, is a termination of the contingency clause. There are two main ways to remove the contingency, depending on the signed contract and the state’s laws. A buyer might have to sign a dedicated document to express that they agree to release the contingency. In other cases, it may expire automatically after a given amount of time. If you have questions about contingency removal, you may want to consult an expert for more information.

    3. Can a mortgage contingency date be past the closing date?

    The closing date is the date when all financial and payment matters are settled and the ownership of the property transfers to a buyer. So, technically, a mortgage contingency should not carry past the closing date. Also, you may want to know that in certain cases, the buyer may be able to ask for a readjustment of the closing deadline if needed.

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