What is a Mortgage Contingency, and How Long Does it Last?

A mortgage contingency is a clause stating that the sale of a home can only occur once certain conditions are met. Contingencies can vary, but they usually include a deadline or timeframe that defines when the conditions must be met. The typical contingency clause will detail when the buyer needs to get a mortgage by and what happens if the homebuyer cannot meet the terms. This usually means that the contract will be voided.

What is a Mortgage Contingency?

A mortgage contingency is a clause written into a home sale agreement which can void the sale if certain conditions aren’t met. This clause is usually added to protect both the homebuyer and seller if the buyer is unable to secure mortgage financing. Mortgage contingencies also specify when an official approval for a mortgage needs to be in place. The date varies, but is usually a week before the anticipated closing date.

Homebuyers may receive preapproval for a mortgage when making an offer on a property. However, they cannot be fully approved until the mortgage lender verifies information from the borrower and details about the property. In most cases, buyers sign their home purchase agreement before getting mortgage approval.

If either party backs out of the purchase agreement before the buyer secures a mortgage, then there are no penalties. Thanks to the contingency clause, the buyer would recover the earnest money deposit with no obligation to purchase the home. Earnest money, also known as a good faith deposit, is money that the buyer presents to show that they're serious about purchasing the home. Buyers who back out after securing a home loan will lose their earnest money deposit, which is often held in an escrow account until closing.

Most mortgage contingency clauses also include lending terms, which set a specific dollar amount and the interest rate the buyer needs to get approval for. They should also state any loan closing fees that may be charged. Lending terms protect buyers, allowing them to back out of a sale agreement if they cannot secure a home loan or if interest rates and fees are too high.

How Long Does a Mortgage Contingency Last?

The buyer and seller must agree on the timeframe in which the buyer needs to secure mortgage approval. A contingency period typically lasts anywhere between 30 and 60 days. If the buyer isn’t able to get a mortgage within the agreed time, then the seller can choose to cancel the contract and find another buyer.

This timeframe may be important if you encounter a delay in getting financed. For example, you may be asked to provide additional documents or run into public holidays that stall the approval. Such delays are common, and setting up a longer contingency period may help prevent the seller from backing out of a sales contract. Furthermore, you may find that—even though you got a pre-approval letter—your mortgage application is denied. In this case, you can try to find another lender to grant you a loan before the deadline.

The negotiation of contingency terms depends on a few factors. In a strong buyer’s market, the seller may be more willing to accept a mortgage contingency with a longer timeframe. In a seller’s market, homebuyers may find it difficult to obtain a deadline closer to the typical 60 days. In any case, sellers prefer buyers who can get funding more quickly.

If you're finding it hard to get a mortgage approved before the end of your contingency period, it's possible to request an extension from the seller. Since granting an extension is entirely up to the seller, you may have to offer additional earnest money to show that you're still serious about buying. Depending on the original contract terms, you may also need an attorney to prepare amendments and get both parties to sign them before the deadline.

Should You Waive Your Mortgage Contingency?

Waiving your mortgage contingency means that you agree to forfeit your earnest money deposit if you fall short of the terms in your sales contract. A contingency waiver may make sense if you want your offer to appear more attractive to the seller. This may be a useful tactic in a seller’s market, where a homeowner might receive multiple offers at once.

However, waiving the mortgage contingency clause introduces significant risks to your situation. Once the seller agrees to a contingency-free sale, backing out at any point means forfeiting any earnest money you provide. Depending on the state you're in, a seller may also have grounds to sue you for breach of contract or financial damages incurred from taking their home off the market.

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