When a buyer’s offer on a home has been approved by the seller and the deal goes into contract, the purchase agreement often includes a mortgage contingency, a clause that means any final purchase will be contingent on the buyer securing financing. 

What does a mortgage contingency include?

Typical mortgage contingency clauses give buyers a certain amount of time to secure financing, usually 30 to 60 days. If, for whatever reason, the buyer is unable to obtain approval for a mortgage during that period, the contingency clause in the contract allows them to walk away from the deal without losing the earnest money deposit they put down when the deal originally went into contract.

A standard mortgage contingency clause will include details on the following:

• What type of mortgage the buyer needs (i.e. a 30-year fixed-rate loan or an adjustable-rate mortgage)
• The dollar amount of the loan required
• An agreed-upon interest rate
• Closing costs for which the buyer will be responsible
• The length of the contingency period, and any terms for an extension, if applicable

While buyers generally go into contract with at least a preapproval for a mortgage, once their offer has been accepted, they need to be formally approved for a mortgage and receive a commitment letter. Before that happens, a lender will confirm financial information about the buyer and conduct a title search and inspection of the property. Information that comes up during this process—for instance, a change in the buyer’s financial circumstances, or an aspect of the property that will decrease its value or require costly repairs—can potentially derail the buyer’s financing, causing the deal to fall through.

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Typical mortgage contingency clauses give buyers a certain amount of time to secure financing, usually 30 to 60 days. Photo: Pixabay

Why Buyers Might Waive Contingencies 

Because the mortgage approval process takes time, sellers and developers often prefer buyers whose offers are all-cash, and therefore don’t depend on mortgage approval (or require a mortgage contingency). In seller’s markets or for in-demand properties, buyers may choose to waive the contingency clause in their contract to make their offer more competitive, a move that poses a significant amount of financial risk.

Contingencies often fall in and out of favor depending on the dynamics of a given real estate market, but for buyers who do require financing, going into contract without a mortgage contingency in place is considered high-risk in any environment.