Mortgage Contingency | How it works when buying a home

In this article, I'll explain the mortgage contingency, show you where to find it in a real estate contract, and tell you why you need to know about it when buying a house.

First, the mortgage contingency allows you, the buyer, to back out of the contract if you can't secure financing for the property by a specific date. The contingency specifies the terms under which you can terminate the agreement if you can't get approved for a mortgage or if the loan terms are unsatisfactory. 

For example, a mortgage contingency might state that you have a specific number of days to apply for a mortgage and provide proof of mortgage approval to the sellers. Suppose you can't secure financing within this time frame. Then, you can terminate the contract and receive a full refund of your earnest money deposit. 

The mortgage contingency protects you when you can't get the financing needed to buy the house. It allows you to back out of the deal without penalty, like losing your earnest money deposit because your financial situation changes unexpectedly.

Where do you find the mortgage contingency? 

The mortgage contingency is part of the real estate contract. The following mortgage contingency is from the Chicago Association of Realtors Real Estate Purchase and Sale Contract. In this version, the mortgage contingency is in section #5. 

Mortgage Contingency. This contract is contingent upon the buyer securing by ________________________, 20____ (Commitment Date) a firm written mortgage commitment for a fixed rate or an adjustable-rate mortgage permitted to be made by a U.S. or Illinois savings and loan association, bank, or other authorized financial institution, in the amount of $________________ of the Purchase Price, the interest rate not to exceed _______% per year, amortized over ______ years, payable monthly, loan fee not to exceed _______%, plus appraisal and credit report fee, if any.

1. Suppose the buyer is unable to obtain the Required Commitment by the Commitment Date. In that case, the buyer shall notify the seller in writing on or before that date. After that, the seller may, within 30 Business Days after the Commitment Date ("Second Commitment Date"), secure the Required Commitment for the buyer upon the same terms and extend the Closing Date by 30 Business Days. The seller or a third party may give the Required Commitment. Buyer shall furnish all requested credit information, sign customary documents relating to the application and securing of the Required Commitment, and pay one application fee as directed by the seller. Should the seller choose not to secure the Required Commitment for the buyer, this contract shall be null and void as of the Commitment Date, and the Earnest Money shall be returned to the buyer.

2. Suppose the buyer notifies the seller on or before the Commitment Date that the buyer has yet to obtain the Required Commitment. Neither Buyer nor Seller secures the Required Commitment on or before the Second Commitment Date. In that case, this contract shall be null and void and the Earnest Money shall be returned to the buyer. 

3. Suppose the buyer does not provide any notice to the seller by the Commitment Date. In that case, the buyer shall be deemed to have waived this contingency and this contract shall remain in full force and effect.

What is the mortgage commitment date, and why is it important?

The mortgage commitment date in a real estate contract is the date on which the lender should issue your mortgage commitment, outlining the mortgage terms and specifying any conditions to meet before closing.

The commitment date marks the point at which you secured the financing required for moving forward with the purchase. Once the commitment date has passed, your next step is to close the loan and buy the house.

You and your lender should pay attention to the commitment date. Make sure you're meeting any conditions required by the lender promptly to avoid delays in the closing process. The lender should meet the commitment date. If they can't, they should contact you, your attorney, and your real estate agent before your commitment date expires. 

Suppose you can't secure financing within the timeframe specified in the mortgage contingency. In that case, you can request an extension to have more time to finalize your loan. However, the sellers don't have to agree to an extension. They may not if they're concerned about delays in the closing process.

How long is a mortgage contingency?

A mortgage contingency is typically 30 days, although the length can vary depending on the specifics of the real estate contract, the sellers, and the local real estate market. 

The mortgage contingency should allow you enough time to apply for a mortgage and provide proof of mortgage approval to the sellers. This time frame can range from a few days to several weeks, depending on the terms of the contract.

The length of the mortgage contingency can influence the seller's decision to accept or reject your offer to buy their home. For example, suppose you ask for a long contingency. In that case, the sellers may be less likely to accept your offer, as they may be concerned about your financing options. On the other hand, if your contingency is too short, you may need more time to apply for a mortgage and receive a response from the lender.

Should you waive the mortgage contingency?

Waiving the mortgage contingency is generally only recommended if you're confident you'll secure the property's financing. Remember, the mortgage contingency allows you to back out of the sales contract if you can't get a loan by a specific date. If you waive the contingency and can't get a loan, you may lose your earnest money to the seller. 

Check out our Sales Contract Explainer to learn all about your contract.

Before waiving the mortgage contingency, consider your ability to secure financing. It would be best if you discussed the matter with your real estate attorney, agent, and mortgage lender to understand the risks involved.