Mortgage Contingencies

Let’s say you’ve found your dream home, everything is perfect, right down to the number of bathrooms and white picket fence. It’s time to put in your offer to the seller. If you’re not buying the home with cash, it’s more than likely that your offer contract will include a mortgage or financing contingency. This type of contingency comes into play when a borrower signs the contract for a new home, then finds they can’t secure financing. In these instances, the mortgage contingency provides buyers with a clause that allows them to cancel the contract of a home purchase without penalty.

In this article, we’ll take an in-depth look at how adding a mortgage contingency clause can protect you during the homebuying process.

What is a contingency in real estate?

A mortgage contingency clause, also known as a financing or loan contingency clause, provides homebuyers with a set timeframe to acquire a mortgage loan for a home purchase. If they are unable to secure a loan, this clause ensures that you can walk away from a signed contract without legal repercussions. Your earnest money deposit will also be returned.

A typical time frame for a mortgage contingency is contracted to last 30 to 60 days, but it must be agreed upon by the buyer and seller in the purchase contract.

Homes that are under contract have an accepted offer on the table, but other buyers still have time to submit a competing one. Whereas, homes that are under a pending contract are close to closing on the final sale, barring any extraordinary circumstances.

What is a contingent offer?

When it comes to purchasing a home, a contingent offer is an offer made by the buyer that includes a protective contingency clause on their behalf. This clause conveys that if certain conditions (such as secure financing) aren’t met then the buyer is able to back out of the purchase contract.

A contingent offer protects you from:

• Losing your earnest deposit money
• Involving yourself in a contract that you can’t afford (Mortgage pre-qualification and pre-approval can also help you better understand what you can afford)
• Other issues that may arise throughout the closing process

As the buyer, you are able to choose which contingencies and terms you want to include in your offer. It may be helpful to work with a real estate professional, either a lawyer or agent, for input on what to include.

Contingencies are designed to protect the buyer, but they can create an extra hassle for sellers. In a hot market, many buyers opt to include fewer contingencies in their offers to make them more attractive to sellers during bidding wars. Choosing to waive contingencies comes with high risks. For instance, if you decide to walk away from a sale you risk losing your earnest money deposit.

Kick-out clause

A kick-out clause is typically written into home purchase contracts when a buyer submits a contingent offer. This clause communicates that the seller is allowed to continue showing the property to other potential buyers and accept a better offer that doesn’t have contingencies. If the seller decides to accept another offer, they can essentially “kick-out” the original buyer and move forward with the other.

In most cases, this clause is also known as the right of refusal. However, the seller still has to provide the original buyer with notice and the opportunity to amend their offer to compete with the new one. If you, as the original buyer, choose to not remove contingencies from your offer (or you are unable to in the time frame given at notice) then the original offer is canceled. Note: if your offer is canceled via a kick-out clause, your earnest money deposit will still be returned.

Common types of offer contingencies

There are a number of varying types of contingencies that may be built into a home purchase contract. They protect both the buyer and seller from unexpected changes throughout the buying process. Some common contingencies, aside from mortgage contingency, include:

Appraisal contingency

When a home’s listed price is significantly higher than its appraised/true value, this clause allows the buyer to walk or negotiate the original listing price down.

Inspection contingency

Inspections prepare a buyer for potential issues they may encounter if they go through with a home purchase. They are usually funded by the buyer. If a home inspector uncovers a deal breaker issue, then this contingency allows the buyer to walk away from the deal.

Home sale contingency

This is the least common contingency, as it is high risk and undesirable to sellers since the home purchase depends on the sale of the buyer’s house. It stipulates that a buyer is not required to follow through on a home purchase if they are unable to sell their current primary residence.

Title contingency

This type of contingency protects buyers from fraudulent sellers and requires a seller to clear up any lien or title issues prior to closing on a purchase.

It’s always best to work with a professional real estate agent who is tapped into the current market when deciding which contingencies you want to include in an offer. Waiving your right to contingencies can add significant risks to a home purchase, and result in a bad deal that can cost you more money.