Mortgage Contingency: Why it matters for buyers and sellers

When you make a home purchase offer, including an earnest money deposit demonstrates your commitment and introduces the critical role of a mortgage or loan contingency in the buying process.

Known as the earnest money deposit, this shows that you’ve got skin in the game, and represents your good faith to buy the home. This deposit is eventually applied to the overall transaction, and appears as a credit on your final closing documents.

Your purchase offer accompanied by earnest money is usually sufficient for sellers to accept your offer, which in turn becomes a bona fide sales contract. Sellers will then take their home off the market while you prepare your financing for closing if you’re not an all-cash buyer.

But what happens if your financing falls through? Will you get your earnest money back? Is the seller left with anything? Such circumstances are outlined in an important purchase contract clause known as the mortgage contingency.

What is a mortgage contingency?

In real estate transactions, contingencies are a lot like the “hurdles” of the race. They are the conditions both buyers and sellers must meet before the agreement is finalized and you get the keys to your new home.

While there can be contingencies for just about anything, such as the house passing inspections, the sale price meeting the appraised value, or even the seller fixing broken light fixtures, the mortgage contingency (also called a “financing” or “loan” contingency) is important because it concerns the outcome of your earnest money and sets loan approval deadlines.

A mortgage contingency usually provides 30 to 60 days for buyers to secure loan approvals — which means that if buyers don’t obtain financing within that period, they risk losing their earnest money deposits, and sellers are legally allowed to cancel the contract.

Why a mortgage contingency is important

Mortgage contingencies are not just contractual formalities; they are essential safeguards that protect both buyers and sellers in real estate transactions. According to recent data, a significant portion of residential real estate deals include a mortgage contingency clause, underscoring its critical role in today's market. This clause is particularly vital in volatile markets or during financial downturns, where the certainty of loan approval can be less predictable. For buyers, a mortgage contingency provides a safety net, ensuring that if a home loan approval falls through for certain reasons, they can withdraw from the deal without losing their earnest money deposit. Sellers, on the other hand, gain the assurance that the buyer is earnest in their attempt to secure financing, safeguarding the seller from prolonged market absences due to failed transactions.

In times of economic uncertainty, the absence of a mortgage contingency can significantly impact both parties. Buyers could face the loss of substantial earnest money deposits, while sellers might experience delays in finding another buyer, potentially missing out on favorable market conditions. The inclusion of a mortgage contingency clause is a testament to the importance of protecting all parties involved in a real estate transaction, ensuring that the process is fair and equitable.

As the buyer, the mortgage contingency protects you financially in several ways.

Mortgage Contingency Offers: Protection in the event of loan denial

While you may be confident that your mortgage will go through without a hitch, there are some things beyond your control that can affect your ability to qualify. For instance, if you suddenly lose your job or if there are issues with the property’s title, appraised value, or condition, a lender may deny financing.

In these cases, the mortgage contingency may allow you to back out of the contract without any legal ramifications.

Mortgage Contingency Offers: Protection from losing your deposit

A loan contingency can also prevent you from losing your earnest money deposit, which is the deposit made to a seller that represents your commitment to buy the home. If your financing falls through for any reason within the designated time frame, your deposit will be returned to you in full.

It’s important for you and your real estate broker or agent to negotiate for this protection before you sign the purchase agreement.

In any real estate transaction, time is of the essence. If there are any circumstances that may jeopardize meeting your loan contingency, then talk to your agent or representative right away.

When mortgage contingencies are removed

All contingencies have a deadline, and each one must be removed or “lifted” in a pre-agreed time frame before the sale can be finalized.

There are two types of contingency removals:

Active removal is when the contractual parties are notified in writing as soon as a specific condition is met, such as when a buyer meets a loan approval contingency.

In this case, you would notify the seller in writing that you have secured loan approval.

Passive removal assumes a condition has been met when a deadline has passed, and the parties in the contract have not canceled the agreement.

In this case, “no news is good news,” but be careful about passive loan contingencies. If for whatever reason you are unable to get financing and don’t notify the seller, then you may still be contractually obligated to buy the home or forfeit your deposit.

Should you waive a mortgage contingency

In unique cases, waiving contingencies and deadlines may make offers more attractive in hot real estate markets.

But waiving a mortgage contingency is generally a no-no, because it puts you at risk of losing your earnest money deposit if you fail to obtain financing. And, in certain states, it could also give the seller grounds to sue you for breach of contract or financial setbacks because they took their home off the market for you.

A more appealing option to make your offer stand out is with a verified preapproval from Better Mortgage. This pre-approval verifies your income, assets, and is essentially underwritten and approved, contingent on a home appraisal and third party inspections.

Bring confidence to the table with a Better verified pre-approval

A Pre-Approval Letter from Better Mortgage means we have fully underwritten and verified your credit, income, and assets. You’ll know exactly how much you’re qualified to borrow, and be able to give the seller the certainty and confidence of an all-cash buyer.

Making sure your loan is fully pre-approved in advance of making an offer is one of the most important steps you can take to winning the real estate race.