A mortgage contingency allows a buyer to terminate a real estate contract without penalty if they cannot obtain a mortgage at a specified rate within a specified time. The clause covers financing percentage, interest rate, and time period. Buyers should be aware of the possibility of not closing on the mortgage and sellers may reject or renegotiate offers with this clause. Real estate agents can provide advice on appropriate clauses.
A mortgage contingency is a provision in a real estate contract that allows you to terminate the contract without incurring penalties if the buyer cannot obtain a mortgage at a specified rate within a specified period of time. This is designed to prevent a situation where a buyer is forced to complete the purchase of a property even if the only available mortgage has very bad terms or if no mortgage can be obtained. Mortgage contingency clauses are very common, and when people review contracts, they should read the clause carefully to make sure it fits their needs.
In a typical mortgage contingency, three different topics will be covered. The first is the percentage of the purchase price available in financing, such as 90%, that requires a 10% down payment. The second is the interest rate, with a mortgage contingency typically specifying a maximum mortgage rate no higher than the average by a few points. Finally, a time period is created, such as 45 or 60 days. If the terms of the loan cannot be met in this period, the deal will be forfeited.
One thing buyers need to watch out for is the possibility of getting a bond from a lender and the mortgage not closing for some reason. This could range from withdrawing a loan offer to losing funds that would have been used for the down payment. Depending on how the mortgage contingency is structured, the buyer may still be responsible for fulfilling the agreement because a mortgage was technically obtained, but it simply didn’t work out.
Sellers can choose to reject an offer with a mortgage contingency clause or they can ask to renegotiate it. For sellers, the goal is to get the property under contract and sold as quickly as possible, even if the terms of the sale don’t favor the buyer. Sellers may not want to lock in a potential sale with a mortgage contingency clause, running the risk of taking the property off the market when it goes under contract and having to put it back if the buyer fails to get a mortgage.
People preparing to buy a property can ask their real estate agents for advice on appropriate clauses to include in an offer. They should also talk about worst-case scenarios so they know what to expect. It may not be possible to buy with a mortgage contingency clause in a very aggressive market where sellers can choose between other buyers without this restriction, for example.
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