Have you found your dream home and are ready to make an offer? However, your bid is more than just how much money you are willing to pay for the house. You don’t need to worry about anything. These conditions must be met for the mortgage contract to be legally binding. Suppose you are not paying cash for a property. In that case, you will almost certainly include a financing or mortgage contingency, a clause in a purchase contract that lets the buyer out of the deal if they can’t get financing. If buyers can’t get a mortgage, they don’t have to keep the earnest money deposit. In this article, we will look at the significance of a mortgage contingency clause, how they work, waiving financial contingencies, and the length of time it should last.
When a homebuyer adds a mortgage contingency to their offer, it is because:
- They do not pay in cash
- The mortgage has not been approved.
- They are unsure whether they will be able to obtain a loan for the total offer price.
If both buyers and sellers accept the offer, they will sign a purchase agreement, and the buyer will pay a deposit to remove the property from the market.
However, the transaction is not yet complete, and this is where the mortgage contingency work comes into play. The buyer must now obtain financing within the parameters of the mortgage contingency. If the buyer can’t get the necessary financing, they can back out of the contract, and the seller will still give them back the money they put down as a deposit. So, let’s define and examine mortgage contingencies below.
What is a Mortgage Contingency?
A mortgage contingency, also known as a financing contingency, protects you if you are unable to obtain mortgage financing. You can’t sell the house with a financial condition until a mortgage company sends you a specific approval letter.
Mortgage pre-approvals and pre-qualifications are not finalized until you receive your complete approval. Many people buying their first home make the mistake of thinking that their financing is safe because they get their approval faster. If your finances have changed since you were approved, you might not get all the money you asked for. You will need to understand a mortgage contingency and how it works first.
Mortgage Contingency Clause
A mortgage contingency clause in a contract states a condition that must be fully met or an action that must be done before a sales agreement is legally binding. A mortgage contingency clause typically allows the buyer to have the home independently appraised and professionally inspected and obtain a mortgage.
Types of Mortgage Contingency
#1. Appraisal contingency
An appraisal condition protects the buyer by making sure that a property is worth a lot at a minimum price that has been set. If the property is not worth at least the amount stated in the contract, the contract can be broken.
There may be clauses in an appraisal contingency that allow the buyer to move forward with the purchase even if the appraisal comes in lower than what was agreed upon. It usually happens within a certain number of days after the buyer gets the appraisal value notice. The seller may be able to reduce the price to the appraisal amount.
The mortgage contingency specifies a release date of or before, which the buyer is not permitted to meet if the seller has any appraisal issues. If not, the mortgage condition won’t be met, and the buyer won’t be able to back out of the deal.
#2. Funding contingency
A funding contingency, also called a “financial contingency,” gives the buyer time to apply for and get the money needed to buy the property. This protects the buyer by letting them back out of the contract and get their earnest money back if they can’t get financing from a bank, mortgage broker, or other types of lender.
A mortgage contingency clause tells the buyer how many days they have to get financing. The buyer has until this date to cancel the agreement (or request an extension that must be agreed to in writing by the seller). Otherwise, the buyer automatically waives the mortgage contingency and becomes obligated to purchase the property.
#3. Home sale contingency
A home sale contingency gives the buyer a set amount of time to sell and settle their current home before financing the new one. This contingency protects buyers by letting them get out of a contract if an existing home doesn’t sell for at least the asking price.
Contingencies on the sale of a house can be complicated for the seller, who may feel pressured to take another offer while the problem is being worked out. If the buyer’s house doesn’t sell within the days specified in the contract, the seller can back out of the deal.
#4. Inspection contingency
An inspection contingency, also called a “due diligence contingency,” gives the buyer a certain amount of time, like five to seven days, to have the house inspected. It protects the buyer by letting them back out of the contract or talk about repairs based on what a professional home inspector finds.
An inspector examines the interior and exterior of the property, including the electrical, finish, plumbing, structural, and ventilation elements. The inspector provides the buyer with a report that details any issues discovered during the inspection.
#5. Kick-out clause
The kick-out clause is a contingency that enables the sellers to protect against a house sale contingency. Even if the seller agrees to a house sale condition, they can add a “kick-out” clause that lets them keep trying to sell the house.
If another qualified buyer steps forward, the seller gives the current buyer a set period of time in which to remove the house sale contingency and keep the contract alive. Otherwise, the seller can cancel the contract and sell to the new buyer.
Risks of Mortgage Contingency Clause
The most significant risk of including contingencies in your offer is that the seller will reject them or that they will be too restrictive to allow you to back out. Consult with your real estate agent if you are in a housing market where your offer may compete with others.
In some hot housing markets, buyers take appraisal contingencies out of their offers to get a better deal. This is risky because the buyers must come up with the cash to split the difference if the property does not appraise enough.
What are the Challenges of Contingencies?
Within real estate contracts, contingencies present their own set of challenges. They are frequently a source of additional stress for both sellers and buyers. Suppose a buyer cannot obtain a home inspection by the contingency deadline. In that case, they must decide whether to proceed before the home inspection is deemed complete or to attempt to extend the deadline if a seller is waiting for their home’s sale to be completed before they can move. Then, mortgage contingency clause deadline extensions can jeopardize their plans to make anything work.
Waiving Your Mortgage Contingency
Waiving mortgage contingency means you agree to forfeit your earnest money deposit if you fail to meet the terms of your sales, especially for you to make it work. This may also be beneficial if you want your offer to appear more appealing to the seller. This could be a helpful strategy in a seller’s market, where a homeowner may receive multiple offers at once.
On the other hand, waiving the mortgage contingency clause puts you in a perilous position. Backing out after the seller agrees to a contingency-free sale means forfeiting any earnest money you provided. Depending on the state, a seller may be able to sue you for breach of contract or financial damages incurred as a result of taking their home off the market.
What does It mean?
The mortgage contingency protects the buyer from losing their down payment deposit if their lender fails to provide financing. Most Offers and Purchase Sales Agreements include this as a standard feature. Consider it a safety net for your deposit.
How it works: For mortgage contingency to work, your Offer to Purchase is conditional on your lender’s statement and commitment to provide you with a mortgage by a certain date. If your mortgage approval does not cover the amount of financing you require. The Seller agrees to fully refund your deposit. In other words, if you put down a deposit and the bank says “no.”
Waiving your mortgage contingency could be an option, you forfeit your deposit to the Seller if your lender withdraws. To put it another way, you’re walking a tightrope without a net.
What can go wrong?
If the Buyer’s financing falls through, the Seller is left with nothing, according to the standard financing contingency. You now bear all of the risk, while the Seller keeps the house and your deposit.
The most obvious disadvantage of waiving your mortgage contingency not to work is the loss of your deposit. However, it is not the only one. If the lender’s appraisal is lower than expected, this strategy will cost you a lot more money. Assume the lender has pre-approved your home purchase for $1,000,000. If you put down 20%, or $200,000, the lender will finance the remaining 80%, or $800,000.
Although pre-approving your finance adds to the strength of your offer, it is not a guarantee unless the lender’s appraisal confirms the valuation. Because the lender wants to ensure that the asset in question is worth the lending risk. If the appraiser’s valuation meets the lender’s risk tolerance, you’ve got the loan. However, if the appraisal falls short of the purchase price, you’re in trouble.
The more common scenario, however, is that the appraisal is lower, but not by enough that the lender withdraws financing entirely. Instead, the lender is likely to reduce their risk by (a) lowering the amount of financing they are willing to extend, (b) raising the interest rate, or (c) doing both.
How to reduce your risk
Waiving your mortgage contingency can be effective even in the face of competitive offers. Here are some ideas to help you reduce your mortgage contingency risk:
- Consult your loan officer. Make sure you have a complete picture of your finances, including your credit score.
- Keep a sufficient amount of money in reserve if your credit score does not match your cash assets when you apply for the loan. This will result in a loan rejection response.
- Pay attention to your loan officer. They’ll tell you not to buy or charge anything until the transaction is completed – and don’t open a new credit card.
Mortgage Contingency Date
- The buyer and seller must agree on a date for the buyer to obtain mortgage contingency approval. A contingency period usually lasts between 30 and 60 days. If the buyer cannot obtain a mortgage contingency within the agreed-upon time and date, the seller can cancel the contract and find another buyer.
- This mortgage contingency date may be significant if your financing is delayed and you genuinely want to make your effort count and work. For example, a requirement to provide additional documents or the occurrence of public holidays that cause the approval to be delayed. Such delays are common, and having a more extended contingency period may help prevent the seller from canceling a sales contract. Furthermore, your mortgage application may be denied even if you have a pre-approval letter. In this case, you can look for another lender to give you a loan before the deadline.
- Several factors influence the negotiation of contingency terms. The property owner may be more willing to accept a longer-term mortgage contingency in a strong market. It would be difficult to obtain a deadline closer to 60 days. In any case, the agent selling prefers buyers who can obtain funding sooner.
- If you are having difficulty obtaining mortgage approval before the end of your contingency date. It is possible to ask the seller for an extension. Depending on the contracts, you may also require the services of an attorney to draft amendments and have both parties sign them before the deadline.
Should I Remove the Mortgage Contingency?
You should take the loan clause out of a purchase agreement if you’re paying cash or know you’ll be able to get financing. In real estate, contingencies allow the buyer or seller to back out of the deal if certain conditions aren’t in place.
What Does No Mortgage Contingency Mean?
The only effect of a buyer waiving the mortgage contingency is that it eliminates the buyer’s potential right to exit the transaction if financing does not come through by the settlement date.
How Long Does a Mortgage Contingency Usually Take?
A contingency period usually lasts between 30 and 60 days. If the buyer can’t get a mortgage within the agreed-upon time frame, the seller can back out of the deal and look for another buyer. This timeframe may be vital if you experience a delay in receiving your funding.
What are the Examples of Mortgage Contingencies?
Common real estate contingencies include an appraisal contingency, an inspection contingency, a home sale or funding contingency, and a “kick-out clause.”
Why would a Buyer Waive Mortgage Contingency?
Buyers may choose not to use this option if they are paying cash for the house or have already been approved for the loan they need. In a market with multiple offers, a seller who wants to close the sale as soon as possible may ask buyers to waive the mortgage contingency.
How long is a contingency offer good for?
A contingency period usually lasts between 30 and 60 days. If the buyer is unable to obtain a mortgage contingency by the agreed-upon date. The seller has the option of canceling the contract and finding another buyer. If you experience a delay in receiving your funding, this timeframe may be critical.
When you find your dream home and want to make an offer, the mortgage contingency clause can protect and assist you in your financial planning. If the home’s appraised value is less than the agreed-upon sale price, the appraisal contingency lets you ask the seller to lower the price, offer more money for the home, or back out of the sale altogether.
Are you in the market for a new house? Find out how much you can afford to spend on your dream home by getting pre-approved for a mortgage.
Mortgage Contingency FAQs
How often are contingent offers accepted?
Among contingent offers, less than five percent fall through, according to multiple sources. Broken offers may arise because the buyer isn’t able to secure financing or because the seller isn’t willing to lower their listing price after a low appraisal.
Is mortgage contingency necessary or should you waive it?
The decision to waive the mortgage contingency should not be taken lightly. If you fail to obtain a mortgage within the contingency period, you will lose your ability to recover your deposit. You can mitigate rejection risks by getting PREAPPROVED FOR A MORTGAGE and confirming with the lender that the property has no outstanding liens.
How long does mortgage sit with an underwriter?
Underwriting—the process by which mortgage lenders verify your assets, check your credit scores, and review your tax returns before they can approve a home loan—can take as little as two to three days. Typically, it takes over a week for a loan officer or lender to complete the process.