When you find the right home to buy, you make an offer, put down a deposit once your offer is accepted and you sign a sales contract. Then you move on to inspections and financing. Pretty straightforward. But what if something goes wrong during the closing process? What if you are not able to qualify for financing after all? What if you can’t sell your home before buying this new one? What if major repairs are uncovered in the inspections? Thankfully, all these issues can be covered by contingency clauses.
What is a Contingency?
A contingency is a condition that must be met before the home sale purchase can conclude. These clauses protect buyers and sellers again loss during the process. For example, some contracts will include that the sale will only proceed contingent upon the buyer being able to find a buyer for their current house before closing on the new one. Other contingencies allow buyers to back out of the sale if expensive problems with the house are detected and the seller is not willing to credit the buyer for repairs or have them completed before closing. Buyers can also request contingencies that cover when the appraisal does not come back as high as the offer price, allowing them to renegotiate to something more in line with the value.
What is a Mortgage Contingency?
There is one important contingency that has to do with the financing. A mortgage contingency, also known as a financing or a loan contingency, stipulates how long a borrower has to obtain the necessary home loan funding before losing their earnest deposit money. Typical contracts allow for between 30 and 60 days, after which time the seller can cancel the purchase contract if the buyer does not have the required financial backing in place. At that point, the seller could keep the buyer’s earnest deposit money and put their house back on the market.
A mortgage contingency, however, would protect the buyer against unforeseen loan issues and they could still get a full refund on their earnest money if they had to pull out of the sale. While most buyers expect the funding process to go smoothly, issues can pop up to derail it. An unexpected job loss, for example, would certainly put the loan at risk, but so could a discrepancy in the appraised value, or if another claim is discovered on the title. In the case of any of these or other problems, with a mortgage contingency, the buyer can back out, not be responsible for coming up with the full price amount on their own, and get their deposit back.
Waiving a Mortgage Contingency
In some rare cases, borrowers may opt-out of a mortgage contingency. This is usually to provide the most attractive offer in a hot seller’s market. However, unless the buyer has a backup of cash to pay for the house outright, this is very risky. If the buyer cannot come up with the financing in the right amount of time, the seller could sue the buyer for breach of contract in some states.
A safer way to provide an enticing offer is to have financing already lined up. Obtaining a full pre-approval from your preferred lender shows sellers that your income and assets have already been verified and that your lender is ready to fund the sale.
In an ideal situation, a real estate transaction moves forward with no hiccups, but buyers and sellers can utilize contingencies in their many forms to protect themselves for those unpredictable loan and home buying scenarios.