Buying a home is a complex process that involves various steps, including financing the purchase. One of the critical aspects of home buying is understanding how a mortgage contingency works. In this article, we’ll explain what a mortgage contingency is, how it works, and the elements of a mortgage contingency clause.
Additionally, we’ll discuss other types of real estate contingencies and whether you should waive a mortgage contingency clause.
What Is A Mortgage Contingency?
A mortgage contingency is a clause in a real estate contract that states that the sale of the property is contingent on the buyer obtaining financing from a lender.
It’s a way for home buyers to protect themselves from financial loss if they’re unable to secure financing for the purchase. A mortgage contingency is also known as a financing contingency or a loan contingency.
How does a Mortgage Contingency Work?
When a buyer makes an offer on a home, they will include a mortgage contingency clause in the purchase contract. The contingency will specify the type of loan, the loan amount, the interest rate, and other details related to the financing of the home.
If the buyer is unable to secure financing for the specified terms, they can cancel the contract and receive their earnest money deposit back.
The mortgage contingency clause typically includes a deadline by which the buyer must obtain financing. This deadline is the contingency date and is negotiable between the buyer and seller.
If the buyer is unable to obtain financing by the contingency date, they can choose to cancel the contract or request an extension. If the seller agrees to an extension, they may also have the right to cancel the contract if the buyer is still unable to obtain financing by the new deadline.
How Long Does a Contingency Contract Lasts?
The length of a mortgage contingency clause varies, but it typically lasts between 30 and 60 days. During this time, the buyer can apply for and obtain a mortgage loan. If the buyer is unable to obtain financing within the specified time frame, they can choose to cancel the contract or request an extension.
Elements of a Mortgage Contingency Clause
A mortgage contingency clause typically includes the following elements:
- The amount of financing required
- The interest rate
- The type of loan
- The term of the loan
- The lender’s name
- The date by which the financing must be obtained
- The consequences of not obtaining financing within the specified time frame
Other Types Of Real Estate Contingencies
In addition to mortgage contingencies, there are several other types of real estate contingencies that may be included in a purchase agreement:
- Inspection Contingency: This type of contingency allows the buyer to have the property inspected by a professional inspector. And, if any issues are found, the buyer can renegotiate the terms of the purchase agreement or even back out of the deal.
- Appraisal Contingency: An appraisal contingency allows the buyer to have the property appraised by a licensed appraiser. And, if the property is appraised for less than the agreed-upon purchase price, the buyer can either renegotiate the terms or back out of the purchase.
- Title Contingency: This type of contingency allows the buyer to review the title report on the property and ensure that there are no liens or other issues that could impact their ability to take ownership of the property.
- Home Sale Contingency: A home sale contingency is often included in a purchase agreement when the buyer needs to sell their current home in order to finance the purchase of the new property. This contingency allows the buyer to back out of the purchase if their current home does not sell within a certain time frame.
- Environmental Contingency: This type of contingency allows the buyer to investigate the property for any potential environmental hazards. Those include lead-based paint or asbestos, and if any issues are found, the buyer can renegotiate the terms.
It is important to note that each contingency must be negotiated and agreed upon by both the buyer and the seller, and each contingency will have specific terms and timelines associated with it.
A real estate agent or attorney can assist in drafting a purchase agreement with contingencies that protect the buyer’s interests while still being reasonable for the seller.
Should You Waive A Mortgage Contingency Clause?
When deciding whether to waive a mortgage contingency clause, buyers should consider a variety of factors. On one hand, waiving the contingency can make their offer more attractive to sellers, potentially giving them an advantage in a competitive market.
On the other hand, waiving the mortgage contingency clause can be risky. If the buyer is unable to secure financing, they could be in breach of contract and lose their deposit or face legal action from the seller. Additionally, if the home does not appraise for the purchase price, the buyer may be unable to secure financing and could be forced to back out of the deal.
Ultimately, the buyer and their real estate agent should carefully consider the decision to waive a mortgage contingency clause. It is important to fully understand the risks involved and to have a solid plan in place for securing financing before making such a decision. In some cases, it may be better to offer a shorter contingency period or to include an appraisal contingency to help mitigate some of the risks.
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