What is a Mortgage Contingency?

A mortgage contingency is a clause in a real estate contract allowing the contract to be canceled without incurring penalties in the event the buyer cannot obtain a mortgage at a specified rate within a set period of time. This is designed to prevent a situation where a buyer is obliged to follow through on a real estate purchase even if the only available mortgage has very bad terms, or if no mortgage at all can be obtained. Mortgage contingency clauses are very common, and when people are reviewing contracts, they should read the clause carefully to make sure it meets 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%, requiring a 10% down payment. The second is the interest rate, with a mortgage contingency typically specifying a maximum mortgage rate no more than a few points higher than the average. Finally, a time period, such as 45 or 60 days, is created. If the terms of the mortgage cannot be met in this period, the deal will be off.

One thing for buyers to be careful of is the potential of getting a commitment from a lender and having the mortgage fail to close for some reason. This could range from a withdrawal of an offer of financing to the loss of 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 deal because technically, a mortgage was obtained — it just didn't work out.

Sellers can choose to reject an offer with a mortgage contingency clause, or 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 hold up 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 on if the buyer fails to get a mortgage.

People preparing to buy real estate 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 from other buyers without this restriction, for example.