In a real estate contract between the buyer and the seller, the contract may include contingency clauses. These are conditions that must be met for the transaction to move forward.
One type of contingency clause is a “mortgage contingency clause.” Simply put, this is a clause stating that if the buyer cannot secure a mortgage loan within a stated time frame, either party is free to cancel the entire sales transaction.
Mortgage contingency clauses may be beneficial for both buyers and sellers. For one, it allows the buyer some time to secure a mortgage while keeping their purchase options open. For the seller, such a clause can help keep the stream of interested purchasers moving along during the sales process and ensure that the buyer is committed to purchasing the property.
Other types of contingency clauses in a real estate contract may include:
- Subject-to-inspection clauses
- Subject-to-building code approval clauses
- Subject-to-attorney-approval clauses
- Subject-to-financing clauses
How Does a Mortgage Contingency Work?
When a buyer wants to purchase a property, their first step is to submit an offer to the seller. If they haven’t been preapproved for a mortgage or aren’t sure whether they’ll qualify for a loan, they may add a mortgage contingency clause to their offer. Once both pirates sign the purchase agreement, the buyer submits an earnest money deposit, and the seller takes the property off the market.
The buyer has the length of the mortgage contingency clause to obtain financing from a lender. Once approved for a mortgage, the buyer provides the seller with a mortgage commitment letter from their lender.
If the buyer doesn’t qualify for the loan or fails to secure financing in time, they can terminate the contract. Either party can back out of the home sale agreement during the contingency period of a mortgage contingency clause with no penalties. The seller can pursue other offers, and the buyer will receive their earnest money deposit back.
What Goes Into a Mortgage Contingency Clause?
A home buyer and seller must agree upon the conditions outlined in the mortgage contingency. Mortgage contingency clauses should include details about:
- Mortgage contingency deadlines: The mortgage contingency period mandates how long the buyer can secure the appropriate loan. The deadline is typically set sometime between 30 and 60 days. Both parties must agree to the timeline. Buyers and sellers may opt to include a mortgage contingency extension date in the purchase agreement.
- This lending term includes provisions for stretching the mortgage contingency period if the buyer cannot obtain the appropriate loan before the deadline. The seller is not obligated to grant a contingency extension. The seller can walk away from the sale at any time if the contingency expires.
- Type of mortgage: Most mortgage contingency clauses specify the type of mortgage the buyer needs to secure. After reviewing loan options, both parties must settle on the kind of mortgage the buyer will need to move forward with the closing process.
- Amount of money needed: The buyer’s specific loan amount must be approved and specified in the mortgage contingency clause. This condition acts as secondary protection for the buyer. If the buyer is approved for a mortgage but not the amount listed in the contract, they can cancel the sale without penalty.
- Closing or origination fees: Before signing a purchase agreement, the closing costs and fees the buyer will be obligated to pay to secure the loan must be established. The mortgage lender typically charges origination fees, which include the cost of processing, underwriting, and funding the loan. It’s helpful for buyers to factor these additional fees into their home-buying budgets.
How Long Does a Contingency Contract Last?
Most mortgage contingency clauses last between 30 and 60 days. When a buyer includes a mortgage in their offer, they must secure acceptable financing within the time limits outlined in the agreement.
If a buyer doesn’t obtain a loan by the end of their due diligence period, they can request an extension from the seller to give them more time to find a loan. The seller has no obligation to grant the extension. If the seller doesn’t grant an extension, the buyer must decide whether to back out of the contract or move forward without the contingency, risking the loss of their deposit.
What Are the Elements of a Mortgage Contingency Clause?
Some of the items included in a mortgage contingency clause include:
- The type of loan to be secured (FHA, USDA, conventional mortgage, etc.)
- The amount the buyer must secure in financing
- The maximum interest rate the buyer deems acceptable
- The maximum origination points or fees the buyer will pay to secure a loan
- Whether another property must be sold to qualify for financing
- A specific mortgage contingency date
- Provisions for extending the contingency if the borrower is unable to secure financing before the deadline
Should I Waive a Mortgage Contingency?
Mortgage contingency clauses are included in most real estate agreements, but some buyers may choose to waive them depending on their circumstances. Buyers may consider waiving a mortgage contingency clause if they’re paying for the property in cash or if they’ve been preapproved for the necessary loan. In competitive markets, sellers weighing multiple offers may ask buyers to waive the mortgage contingency clause to close a sale quickly.
Waiving a mortgage contingency clause can be risky. If a buyer’s mortgage application falls through after waiving the protective clause, they’ll lose their earnest money deposit and be subject to additional fees and potential lawsuits.
Mortgage contingency clauses are commonly used as safety nets to protect homebuyers and sellers from unexpected changes during the homebuying process. Both parties should be prepared to discuss lending terms during negotiations and understand the risks of waiving the clause.
What Is a Subject-to-Financing Clause?
A subject-to-financing clause is very similar to a mortgage clause. A subject-to-financing clause allows buyers to make a purchase offer before knowing what financing they can obtain. Here, the buyer is also free to withdraw from the transaction if they cannot secure some form of mortgage or loan.
Subject-to-financing is often the same as a mortgage clause. One slight difference between the clauses is that a subject to financing clause may have more to do with the buyer’s ability to make an offer in the first place. The offer may already be in place with a mortgage contract, and the seller may simply be waiting for the buyer to secure a mortgage arrangement.
Some buyers or sellers may be very particular and enforce a “subject-to-a-new-mortgage” clause. This type of clause addresses a specific type of financing: a new mortgage rather than a second or third mortgage.
Do I Need a Lawyer for Assistance With a Mortgage Contingency Clause?
Real estate transactions are generally very complex and require the assistance of a contract lawyer. If you have any questions, concerns, or disputes about a mortgage contingency clause, it is in your best interests to contact a mortgage lawyer immediately.
Since real estate laws may vary by state, you may need to consult with an attorney regarding reviewing, drafting, or editing a real estate contract. Your attorney can also represent you in court if you have any legal disputes over the contract.