What is a Mortgage Contingency?
Mortgage Contingency in a Real Estate Contract
For the purchase and sale of a property, it is necessary to have a written contract. The contract will contain many terms, but the binding nature of the contract will be dependent on a range of “contingencies” that may or may not be necessary for a particular transaction. The most common contingency is a mortgage contingency. A party to a real estate closing may ask: “What is a Mortgage Contingency?”
Unless the Buyer is paying cash, they will need to get a mortgage to pay for the real estate property. Most parties want to have the contract signed as soon as possible, so the contract is usually signed before a mortgage is acquired. However, the Buyer will not want to be stuck with having to purchase the property if they cannot get a mortgage. Therefore, the contract would contain a mortgage contingency, stating that the Buyer will not be forced to follow through with the purchase if they cannot acquire a suitable mortgage, of a certain amount, by a certain date.
A mortgage contingency is satisfied when the Buyer receives a Mortgage Commitment Letter from their lender. The Mortgage Commitment Letter might contain it’s own contingencies, so it is important to have a real estate attorney review the Mortgage Commitment Letter to make sure it really is a commitment.
If a mortgage cannot be obtained by the specified date, a reasonable extension may be requested. If an acceptable mortgage cannot be attained at all, the contract can be cancelled, but the Buyer may be forced to pay a fee to the Seller or the Seller’s Attorney for the preparation of the contract. it is the responsibility of the Buyer’s attorney to inform the Seller’s attorney of the inability to acquire the financing, or the contract will become binding.
A Mortgage Contingency is a wonderful tool in the hands of a Buyer. It allows them to make sure a property is theirs to buy before they go through the hassle of lining up financing, and allows them to avoid the purchase if they cannot get a mortgage. There are consequences to failing to meet a mortgage contingency, so it is important to act reasonably.