Mortgage Contingencies

When you’re buying a house, there are a lot of unknowns. Contingency clauses in your purchase contract might help take away some of the uncertainty of buying a home by detailing conditions that must be met before closing will take place.

How mortgage contingencies protect buyers

A mortgage contingency gives buyers added security during the home-buying process. It states that a buyer will try to get a particular kind of mortgage (traditional, Veterans Affairs or Federal Housing Administration) at or below a certain interest rate for a set amount of the purchase price (generally 80 percent) by a specific date before closing. If the buyer is unable to secure a loan at the stated terms, he can back out of the contract, and the earnest money deposit returns to him.

How mortgage contingencies protect sellers

Mortgage contingencies provide protection for sellers as well. The deadline for the contingency can be set at least a few weeks before closing to prevent the buyer from backing out at the last minute, for example. The earnest money could also be negotiated at a percentage that is high enough to pose a significant loss to the buyer if he or she doesn’t properly follow through with securing financing.

Other common contingencies

Appraisal contingencies go hand-in-hand with the mortgage contingency. There are two ways appraisal contingencies work. One version states that if a buyer can’t get an appraisal that is at least as high as the seller’s asking price, the buyer may back out of the deal. The other states that if the buyer can’t get an appropriate appraisal, the buyer can ask the seller for a lower purchase price. Then, if the seller refuses, the seller may back out.

Inspection contingencies give the buyer a certain period of time (usually three to 14 days) to perform whatever inspections are needed to confirm his or her interest in the home. If these inspections reveal any problems, both sides can renegotiate or the buyer can back out of the deal.

Pay attention to the fine print

The wording of a contingency is key—they are not just filler in your contract! If you’re not paying attention, you could lose money, miss deadlines and, worst of all, you could be liable for buying a property even if you can’t procure a loan. It is recommended and wise to have an experienced team of real estate professionals guide you through the process of your real estate transactions.