Mortgage contingencies are important clauses in a purchase and sale agreement that can help protect buyers and sellers during the process of buying/selling a home. These contingencies can release either party from the contract if certain criteria aren’t met.
Newrez strives to give our borrowers the know-how to navigate their mortgage with confidence. Below, we’ll break down how mortgage contingencies work, what they include, and why they matter for both sides of the transaction.
Understanding the Mortgage Contingency Clause
A typical mortgage contingency clause may specify that the buyer is required to secure financing of a certain amount by a certain date before closing.
In other words, the buyer’s commitment to purchase the home depends on securing financing that meets agreed-upon terms. In this example, if the buyer is unable to get approved for said financing, they can walk away without losing their earnest money deposit.
Why It Matters:
For Buyers: It’s a safety net so they’re not stuck with a mortgage they can’t afford.
For Sellers: It sets expectations and keeps financing on track with deadlines.
Types of Mortgage Contingency
1. Financing Mortgage Contingency
Financial contingency clauses will vary from contract to contract, but their general format is this: They typically allow the purchase and sale agreement to be canceled if financing cannot be secured in a specific timeframe. This contingency sets a window—perhaps 20 days, perhaps 60—for the buyer to lock in financing.
This contingency also usually states a minimum loan amount needed to complete the purchase. If the lender approves less, the buyer can be released from the agreement without penalty. But if the buyer fails to secure financing at all within the deadline, they may lose their deposit.
This contingency may also specify a maximum interest rate and loan type, such as an FHA or VA loan. If the buyer is unable to get approved for the target rate or below, the buyer can leave the contract.
2. Inspection Contingency
In this instance, the contingency clause could specify that the purchase of the home hinges on the property passing inspection. If the home doesn’t pass, the seller might have to make repairs or bring down the sale price. Otherwise, the buyer might walk away.
3. Appraisal Contingency
This contingency states that the property must be appraised at a certain value or higher. If the appraisal falls below that, the buyer may negotiate the price or leave the agreement. Appraisal contingencies can also include a time limit within which the property must be appraised.
4. Sale of Previous Home Contingency
This contingency could protect buyers who need to sell their current home to finance the new purchase, enabling the buyer to leave the contract if their existing home doesn’t sell within a certain timeframe.
How Mortgage Contingencies Can Protect Buyers and Sellers
Buyers:
- Financial Safety Net: If financing falls through, buyers aren’t forced into a purchase they can’t afford.
- Earnest Money Protection: Buyers usually can keep their deposit if they cancel for valid financing reasons within the contingency period.
- Minimized Property Surprises: Appraisal and inspection contingencies can help ensure the buyer knows exactly what they’re getting for their financing.
Sellers:
- Structured Progress Tracking: Sellers can be assured of financing deadlines, helping them to plan next steps.
- Ability to Terminate if Financing Falls Through: If buyers miss deadlines or are unable to lock in a loan, the contract can be canceled.
What Happens if the Mortgage Contingency Expires?
If a purchase and sale agreement contains a mortgage contingency that specifies a deadline for the buyer to find financing, for instance, and the buyer misses that deadline, the buyer could lose their deposit.
Why It Matters:
- Buyers risk losing deposits or facing legal consequences if financing fails.
- Sellers gain full leverage to enforce the contract or move on to other offers.
Best Practices for a Smooth Financing Process
For Buyers:
- Contact us to get pre-approved* before making an offer. A pre-approval letter shows sellers you’re a serious buyer, and also helps you get a clear idea of how much house you can afford.
- Monitor interest rates and lock in when favorable.
- You have the option to ask for an inspection contingency to help ensure the property is up to par.
- Ask for extensions early if delays arise so you don’t lose your deposit.
For Sellers:
- Verify the buyer has a pre-approval.
- Set realistic contingency deadlines.
- Request regular updates on financing progress and keep open lines of communication.
- Keep backup offers in play just in case.
The Bottom Line
Contingency clauses could protect both the buyer and the seller so the process moves along smoothly and expectations are met. Your real estate agent or attorney may be able to help you better understand the particulars of your purchase and sale agreement if you have questions.
Want to learn more about Newrez loan products? Our mortgage experts are always glad to walk you through your options. Don’t hesitate to reach out today.
