A mortgage contingency is a legal clause in a real estate transaction agreement. The clause states that the transaction will get canceled if a buyer fails to secure a mortgage.
70% of the real estate contracts have a mortgage contingency attached to them and 15% get canceled due to a buyer failing to get a mortgage.
This contingency clause sets a timeline for the buyer to secure a mortgage. If the buyer doesn’t get a mortgage in the given timeline, they can exit the transaction.
For first-time homebuyers, it’s important to know all the legal terms related to a home sale transaction before applying for a mortgage. Start here! Find out how much mortgage you can afford.
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How Does a Mortgage Contingency Work?
A mortgage contingency clause mandates the deal is contingent or dependent on the condition that the buyer secures a mortgage. Here’s how the mortgage contingency process works:
- Submission of Purchase Agreement: The process starts with a buyer submitting a purchase offer to the seller.
- Adding the Contingency Clause: If the buyer hasn’t received a pre-approval, they add a mortgage contingency clause to the purchase agreement.
- Earnest Money Payment: After the buyer and seller sign the agreement, the buyer pays the earnest money.
- Contingency Timeline: The buyer gets a set timeline to acquire a mortgage for the house, usually 30-60 days.
- The Clause gets Invoked: The deal gets terminated if the buyer fails to secure the mortgage in the given timeframe.
- Re-payment of Earnest Money: The buyer receives back their earnest money and the seller can seek offers from new buyers.
To ensure you can comfortably afford the home and avoid potential issues with securing a mortgage, consider using a mortgage calculator to estimate your monthly payments and loan eligibility before finalizing the deal.
How Long Does a Contingency Contract Last?
The contingency duration usually lasts for 30-60 days. A “contingent” status is attached to the home during this period.
From the buyer’s perspective, they must secure a mortgage within this timeframe. As for the seller, they cannot accept any offers from any other buyer during this period.
What Does a Mortgage Contingency Clause Contain?
A mortgage contingency clause protects both the buyer and the seller. To make the clause claimable, certain details need to be included. Here’s a list of particulars of the contingency clause:
- Loan Type: The clause consists of the loan type the buyer will apply for.
- Loan Amount: The exact amount a buyer requires for the home purchase.
- Contingency Date: A contingency clause mentions the date, whereby, the buyer must get a home loan.
- Mortgage Points Limit: The maximum origination fee the buyer can pay to secure the loan.
- Interest Rate Limit: The clause includes the maximum interest rate the buyer can afford for the mortgage.
Can I Waive the Mortgage Contingency Clause?
You can waive the mortgage contingency by submitting a contingency removal form. This form can be submitted anytime during the contingency period.
As a buyer, the decision to waive mortgage contingency will be risky. Here are the drawbacks of removing it:
- You won’t get back your deposit money.
- You may have to pay the penalties associated with contingency removal.
Other Types of Real Estate Contingencies
Several contingencies are attached to a real estate agreement. Here’s the list:
- Home Inspection Contingency: This contingency gives the buyer a timeframe to get the property inspected. If the inspectors find any defects with the property, which the seller denies to repair, the contract gets terminated.
- Appraisal Contingency: In this contingency, the buyer conducts an appraisal of the property. If the home’s appraised value exceeds the seller’s demand, the deal stands canceled.
- Insurance Contingency: The buyer must obtain property insurance before closing the deal. If they fail to do so, the agreement is terminated.
- Title Contingency: The buyer must conduct a title search of the property. If any disparity is found, the transaction is canceled.
Bottom Line
A mortgage contingency clause in a home sale agreement saves the buyers from losing their deposits.
With interest rates rising, more and more homebuyers may fail to secure a mortgage, which makes mortgage contingency essential.
As a homebuyer, draft your sale agreement cautiously and attach all the required contingencies. You can start by browsing for lenders online.
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Frequently Asked Questions
Can I get my earnest money back even after signing the purchase agreement?
Yes, the seller will pay you back the earnest money deposit if the agreement has a mortgage contingency clause attached.
Whom to submit a mortgage contingency removal form?
In most states you will need to submit the mortgage contingency removal form to a listing agent.
Does the mortgage contingency clause include the exact date by which I need to secure a mortgage?
Yes, the clause contains the exact date, whereby you should get a mortgage.
