What Is a Mortgage Contingency?

Written by Steven PorrelloFebruary 9th, 20235 minute read

Contingencies are clauses in a sales contract that protect both buyers and sellers from unexpected events that could derail a real estate transaction. They allow both parties to walk away without penalties if unforeseen circumstances arise or certain conditions aren’t met.

One important condition for buyers is getting approved for a mortgage. If a buyer cannot secure financing from a lender, they won’t have the means to buy a home. For that reason, many buyers add a mortgage contingency to their offer, which allows them to break a sales contract if the mortgage application falls through.

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What is a mortgage contingency?

A mortgage contingency is an escape clause in a buyer’s offer. It gives the buyer a certain amount of time to get a mortgage before closing on a home. If the buyer cannot secure a mortgage before the contingency period ends, the buyer is allowed to walk away from the deal with their earnest deposit firmly in hand.

Likewise, the contingency allows sellers to terminate a deal without repercussions if the buyer can’t get a mortgage in the allotted time.

What’s included in a mortgage contingency clause?

Mortgage contingency clauses involve some carefully crafted wording. Most clauses include the following:

Loan details: which mortgage the buyer is applying for (conventional, FHA, VA, USDA), as well as the loan amount.

Contingency deadline: the date when the contingency expires, usually 30 to 60 days.

Closing costs and origination fees: which closing costs the buyer expects to pay to secure their mortgage. The buyer may also include the highest interest rate they can afford on their monthly mortgage.

How long does the mortgage contingency last?

The mortgage contingency period usually lasts 30 to 60 days. The time frame can vary, however, depending on the state of the real estate market and the time of year. For example, 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.

What if the buyer doesn’t get mortgage approval before the contingency deadline?

Buyers have a few options if they can’t secure financing:

Cancel the contract. You can write a message to the seller that you're backing out of the deal. In this case, you can keep your earnest deposit, and the seller will have to relist their home.

Waive the contingency. If you — and the seller — are confident in your finances, you can choose not to move forward with the purchase. This is called “passive removal.” You'll keep trying to secure financing, and the seller will wait for you. However, removing the contingency means you could lose your earnest deposit if the seller decides to cancel the contract later.

Ask for an extension. You can request an extension to get a mortgage. The seller can then choose to grant the extension or break the contract. You could also negotiate an extension with the seller before the contingency period officially begins.

Do I need a mortgage contingency?

Though not strictly necessary, mortgage contingencies protect buyers from losing their earnest money deposit if they can’t get a mortgage. Considering the earnest deposit is usually 1–2% of a home’s sale price, or $3,000–6,000 for a $300,000 home, buyers are better off including this contingency.

Even if you're confident you can get a mortgage, unforeseeable events can hurt your ability to get a loan, such as:

  • Lose or change jobs
  • Incur debt from an expensive emergency
  • Your mortgage application is higher than your preapproval delays

Do I still need a mortgage contingency if I have a preapproval letter?

Even if buyers have a mortgage preapproval, they should strongly consider having a mortgage contingency.

A preapproval shows a lender has looked at the buyer's finances and deemed them capable of borrowing a certain amount.. But a preapproval doesn’t guarantee their mortgage application will be accepted. A mortgage contingency gives buyers peace of mind that they can cancel a contract without penalties if they’re denied a mortgage — even with a preapproval.

Is it okay 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.

The market is competitive. In hot seller's markets, buyers may waive the mortgage contingency to make their offers stand out. Always ask your real estate agent if this is a smart idea, as not all markets warrant the risk.

The buyer is using seller financing. In this case, the buyer is borrowing money from the seller to buy their home. They’ll pay the seller directly, rather than making monthly mortgage payments to a lender.

The buyer is paying cash. The buyer isn’t getting a mortgage, so they don’t need the contingency.

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Should I accept a mortgage contingency?

Sellers should consider accepting a mortgage contingency from a buyer if:

The buyer has a mortgage preapproval. If the buyer is already preapproved for a loan amount (and your home sale falls squarely within that amount), the buyer will likely be approved.

It's a buyer's market. You may not want to lose this buyer. In that case, accepting the mortgage contingency might be in your best interest.

You might not want to accept a mortgage contingency if you’re in a hot market

Offers with fewer contingencies often mean you can close faster. If you have so many offers you don’t know where to start, you could organize those with the fewest contingencies.

What are some other common contingencies?

Home inspection contingency

This gives the buyer the right to schedule a home inspection within a specific time frame. They can break the contract or renegotiate the sale price if the inspection finds the home in need of significant repairs. There can also be specific requirements in the home inspection contingency, such as a pest or termite infestation inspection.

Appraisal contingency

The appraisal contingency allows buyers to escape a contract if the home’s appraised value is lower than the sale price.

Title contingency

Under the title contingency, buyers can break a deal without penalty if a title inspection brings up liens or encumbrances.

Home sale contingency

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