What Is a Mortgage Contingency? How It Protects Buyers

A mortgage contingency (also known as a “loan contingency” or “financing contingency”) is a clause in a real estate purchase agreement that allows the buyer to back out of a home purchase if they cannot secure a loan by a certain date. Mortgage contingencies ensure buyers aren’t legally obligated to buy a home they can’t afford and allow them to recover their earnest money deposit.

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How a mortgage contingency works (step-by-step)

It’s important to understand the loan contingency process because it dictates the timeline of the purchase. It’s an active period during which a buyer must take specific steps:

1. Submitting an offer: When a buyer submits an offer on a house, their real estate agent or a lawyer includes a mortgage contingency clause in the contract.
2. Accepting contingency terms: The seller accepts the offer with a mortgage contingency or negotiates the terms. When both parties reach an agreement and sign a contract, the clock starts ticking on contingencies.
3. Applying for financing: A buyer must apply for the loan, typically within 5–7 days after signing the contract.
4. Processing application: A lender underwrites the file, checking credit, income, and debts to issue a conditional approval. 
5. Resolution: Once the loan is approved, the contingency has been met. If the buyer is denied, they must provide the denial letter to the seller to terminate the contract and recover their earnest money deposit.

Active vs. passive contingency removal

When including a contingency clause in a purchase contract, it’s important to understand which type of contingency removal is a standard practice; different states have slightly different standards.

Active contingency removal: In this case, a buyer must sign a document explicitly stating that they were able to secure financing and are removing the contingency. If a buyer doesn’t sign the removal document before the deadline, the seller may have the right to cancel the contract (after following the contract’s notice procedures).

Passive contingency removal: In some contracts, if the deadline passes and the buyer has not notified the seller of any issues, the contingency is automatically waived. In this case, a buyer might be legally required to close, even if their financing falls through.

What’s included in a mortgage contingency clause

A mortgage contingency clause is very specific. It gives precise details about the financing the buyer must get to be obligated to close. This prevents a buyer from being forced into a loan with bad terms just to save the deal. Most clauses include the following:

• Loan type: Specifies the mortgage the buyer is applying for (conventional, FHA, VA, or USDA)
• Maximum interest rate: A cap on the rate a buyer is willing to accept (for example, not exceeding 7.0%)
• Minimum loan amount: The specific dollar amount the buyer needs to borrow
• Contingency deadline: The date when the contingency expires, usually 30 to 60 days
• Buyer obligations: A promise to apply promptly for a loan and to cooperate fully with the lender
• Seller rights: What the seller can do if the deadline passes without a decision

Mortgage contingency timeline: How long it lasts

The mortgage contingency period usually lasts 30 to 60 days.

The timeframe can vary, however, depending on location, the state of the real estate market, and the time of year:

• Complex finances: If the buyer is self-employed, using gift funds, or holding multiple jobs, underwriting may take longer. This would require a longer contingency.
• Competitive markets: In a hot market, buyers may shorten this window (for example, to 21 days) to make their offer stand out.
• Seasonality: During the summer, lenders are busier and may need more time to process loans. Similarly, if the buyer makes an offer around the holidays, a seller may consider a longer contingency period, as lenders’ offices may be closed for part of that time frame.

Contingency date vs. closing date

Buyers need to understand the difference between the two. The contingency date is the deadline to get the loan approved. By contrast, the closing date is the date of the ownership transfer, when buyers get the keys to the new home. This is usually a week or two after the contingency date.

What happens if the buyer doesn’t get financing before the mortgage contingency date

If the mortgage contingency date is approaching and the buyer haven’t heard a clear “yes” from the lender, there are three options:

Cancel the contract

If the lender issues a denial, the buyer’s agent sends a written notice of termination along with the denial letter. In this case, the buyer can keep their earnest money deposit, and the seller will have to relist their home.

Ask for an extension

If the lender needs a few more days for paperwork, the buyer’s agent can request an extension from the seller. The seller can then choose to grant the extension or break the contract. A buyer could also negotiate an extension with the seller before the contingency period officially begins.

Waive the contingency

If the buyer — and the seller — are confident in the buyer’s finances, they can choose to let the contingency expire, which is called “passive removal.” The buyer can keep trying to secure financing, and the seller will wait. However, if the loan doesn’t come through, the buyer could lose any earnest money.

Here’s an example of how it could look in real life. Let’s say a buyer is still waiting on the bank’s decision when the loan contingency date is about to expire. They notify a seller before the deadline, but the seller refuses to grant the extension. In this case, the contract is voided, and the earnest money deposit is returned to the buyer.

Should buyers include a mortgage contingency?

For the vast majority of buyers, the answer is yes.

Though not strictly necessary, mortgage contingencies protect buyers from losing their earnest money deposit, which is typically 1–3% of the home’s sale price. On a $400,000 home, this amounts to $4,000–12,000.

Even if the buyer is confident they can get a mortgage, unforeseeable events can hurt their ability to get a loan, such as:

• Unexpected job loss
• Expensive emergencies that drop credit scores
• The home failing to meet the lender’s safety standards
• Lender delays

Is it ever smart to waive the mortgage contingency?

Buyers may consider waiving the mortgage contingency when they're in a competitive market or using nontraditional financing, such as buying with cash. It's important to weigh the pros and cons and make sure waiving the contingency is worth the risk.

Reasons to waive the mortgage contingency

• The market is competitive: In hot seller's markets, buyers may waive the mortgage contingency to make their offers stand out. Not all markets warrant the risk, so buyers will want to talk to an agent before deciding to do this.
• Paying cash: Because the buyer is not applying for a mortgage, a financing contingency is unnecessary.
• Fully underwritten preapproval:This type of preapproval means the lender’s underwriting team has fully verified the buyer’s application. It has more weight than standard preapproval and offers a higher likelihood that the loan will be approved (although still not 100%).
• Liquid backup assets:If the buyer is sure they can cover the home purchase with cash if the loan is denied, they may consider forgoing the loan contingency.

Buyers who decide to waive the mortgage contingency must make sure they are well aware of the risks. In this situation, if their financing fails, they are in breach of contract, and the seller can keep the earnest money deposit.

In rare cases, the seller could even sue the buyer to force them to buy the house or pay for damages.

Mortgage contingency for sellers: Should you accept one?

Accepting a mortgage contingency is a standard move, but it does add some uncertainty to the sale. The seller will have to take the home off the market for weeks, hoping the buyer’s bank comes through.

Consider accepting a mortgage contingency from a buyer if:

• The buyer has a strong preapproval letter from a reputable lender
• It's a buyer's market and the seller doesn’t have other offers on the table
• The seller prefers the security of a contract over the hassle of continued showings

Consider declining a mortgage contingency from a buyer if:

• The seller is in a hot market and have received multiple offers already
• The buyer has a low down payment or weak credit score and might not qualify for a loan
• The seller needs to close very quickly and cannot wait 45–60 days for underwriting

If a seller decides to accept a mortgage contingency, they don’t have to agree to generic terms. They can counteroffer by shortening the contingency window (for example, 30 days instead of 45) or requiring the buyer to get prequalified with a preferred lender. They can also ask a buyer to provide updates on their loan approval process to stay informed.

Mortgage contingency extension

A buyer can usually request a mortgage contingency extension if they cannot secure financing on time (for example, if the lender is moving slowly). Buyers should communicate any requests for an extension to the seller as soon as possible through a realtor or lawyer. Keep in mind that it must be in writing to be legally binding. 

• Will the seller grant it? Usually, yes, if the delay is minor and the buyer needs only a couple of extra days. Generally, sellers want to close and wouldn’t want to start over with a new buyer.
• Can the seller refuse it? Yes, especially if they have a backup offer or if they see that the buyer is stalling.

A contingency extension may affect the closing date, but it doesn’t have to. In some cases, it’s possible to extend the contingency date while keeping the original closing date; in others, a buyer may need more time and will need to adjust the closing date accordingly.

Other common contingencies buyers should know

A mortgage contingency is just one type of contingency that's common when buying a house. Here are a few other contingencies that are possible to add to a purchase agreement.

Home inspection contingency

This contingency gives the buyer the ability to schedule a home inspection within a specified timeframe. If the home inspection reveals major defects or the need for significant repairs, it allows the buyer to break the contract or renegotiate the sale price.

Appraisal contingency

The appraisal contingency protects buyers if the home’s appraised value is lower than the sale price. It allows the buyer to renegotiate or walk away rather than paying the difference in cash.

Title contingency

Under the title contingency, buyers can terminate a deal without penalty if a title inspection reveals liens or legal disputes.

Home sale contingency

If the buyer can't sell their current home before closing on a new one, the house sale contingency permits them to get out of the contract.

Final takeaway

A mortgage contingency is one of the most important clauses in the purchase contract. It ensures the buyer is not forced into buying a property they cannot afford and that they won’t lose their earnest money if denied a loan. While waiving it can help win a bidding war, buyers should understand the consequences and talk to a professional beforehand.

Need help writing a winning offer or deciding what contingencies make sense before accepting one? Clever Real Estate connects you with trusted agents who know how to craft competitive offers. Get started with a short quiz!

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