Buyers generally must get a mortgage loan to buy a house. Wise buyers include a mortgage loan contingency clause in the sales contract with the seller to protect themselves should they be unable to get a loan. Here’s how mortgage contingency clauses work and how they protect buyers and sellers.
The contingency has your back
A mortgage loan contingency protects the buyer from having to go forward with a home purchase in situations where he is unable to secure financing. The contingency clause provides that if the buyer cannot get a mortgage loan by a certain deadline, he is no longer obligated to buy the house. Of course, the buyer must make a good faith effort to secure financing and is obligated to meet certain mortgage application deadlines. Buyers who don’t can lose the protection the contingency clause is meant to provide.
The mortgage contingency should spell out the amount of the buyer’s down payment, the type of loan sought, the length of the loan, and the interest rate.
If mortgage loan approval is delayed or denied, the mortgage loan contingency requires the buyer to notify the seller in writing by the deadline. The buyer can request an extension of time or can terminate the contract and receive his earnest money back. (Earnest money is the amount, usually a few thousand dollars or a percentage of the sales price, the buyer pays when submitting an offer to buy a house. When a sale goes forward, the earnest money is credited to the buyer at closing.) If the mortgage application is denied and the buyer doesn’t notify the seller in time, the seller can keep the earnest money as compensation or even sue to force the buyer to go forward with the purchase.
The mortgage loan contingency can be removed at its deadline either actively or through simple expiration, depending on its wording. Some types of contingencies state that the seller must actively lift the contingency upon reaching the deadline. If the seller neglects to do this, it gives the buyer more time to complete the mortgage approval process.
Related – How to Navigate a Contingency Offer