What is a Mortgage Contingency Clause and Why is it a Bad Idea to Waive it?

22 Aug 2019

In a hot market where inventory is slim, and buyers are coming out of the woodwork (pun intended), it’s common to feel some pressure to make concessions to win over a seller. This is often the only way to compete with all-cash buyers. If you’re financing, then this can present a dilemma. Contingencies are a common part of any real estate contract. They’re there to protect the buyer and allow them a way out of the contract if certain contingencies aren’t met. Today we’re looking at the mortgage contingency. To waive this is a big risk and below we explain why.

What is a mortgage contingency?

A binding real estate contract in which both parties have signed is a fully protected legal document. Unless under certain conditions stated in the contract, neither party can exit the deal without being liable for legal action. As part of signing the contract, the buyer will be asked to make an earnest money deposit. For most of the country, this will be 1-5% of the purchase price. This is to show they are serious about the purchase. If they try to back out of the deal, they will lose that deposit.

As part of the deal, the contract will include a number of clauses by which it may be exited without legal repercussions. One of these is the mortgage contingency. This states that if the buyer is unable to secure financing for the purchase by a certain time then the contract is voided. The buyer will get their deposit back and be free to walk away. For the seller, it’s back to the drawing board to find a new buyer.

The exact wording of each mortgage contingency will vary from deal to another. But most will only allow the buyer to back out and get their deposit back if they do not directly cause the financing to fail through some act of bad faith.

The most common terms by which the buyer can claim the mortgage contingency is if:

  • They have applied in good faith for the loan within a specified time period after receiving the fully executed contract.
  • The buyer has filled out the loan application in a truthful and accurate manner and provided all necessary information to the lender.
  • They have abided by all terms presented by the lender as part of the application process.
  • The buyer has not applied to borrow more than what was specified in the mortgage contingency.

Once the buyer has their loan commitment letter they must proceed with the deal. They can no longer activate the mortgage contingency, back out of the deal or get their deposit back if they do.

Why would a Buyer waive the mortgage contingency?

In a tough market with limited inventory sellers have a lot of options in which buyer they choose. The best offers will be from an all-cash buyer with no contingencies, the next best is all-cash with contingencies. Then it goes financed with no contingencies and financed with contingencies. As this suggests, if you’re financing, then dropping some contingencies will make your offer more attractive. Your buyer’s agent will be able to glean some information from the listing agent on what the competition is and what your offer should be. Wavering the mortgage contingency may be one of those suggestions.

As part of the deal, the contract will include a number of clauses by which it may be exited without legal repercussions. One of these is the mortgage contingency. This states that if the buyer is unable to secure financing for the purchase by a certain time then the contract is voided. The buyer will get their deposit back and be free to walk away. For the seller, it’s back to the drawing board to find a new buyer.

The exact wording of each mortgage contingency will vary from deal to another. But most will only allow the buyer to back out and get their deposit back if they do not directly cause the financing to fail through some act of bad faith.

Should you waive it?

The decision to waive the mortgage contingency should not be taken lightly. If you fail to obtain a mortgage within the contingency period, you will lose your ability to recover your deposit and back out of the deal. The down payment is a large one this could put you at risk of loses tens of thousands of dollars. Even if you feel very confident that you will be approved for financing there’s always a chance that something could go wrong at the last minute. The lender may change their underwriting criteria, or you could suffer a job loss leaving you open to rejection. You can mitigate the risks of rejection by getting preapproved for a mortgage and confirming with the lender that the property has no outstanding liens.   

Deciding to waive the mortgage contingency could mean the difference between getting your dream home or not. But it’s a decision that should be carefully weighed first. Talk with your buyer’s agent and lender before making a decision. You could stand to lose a lot more than just the chance to buy the property if your mortgage is not approved.

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