ABA Family Legal Guide

Buying and Selling a Home

The Steps of Buying and Selling a Home

Making an Offer: The Purchase Contract

What is a mortgage-contingency clause?

A mortgage-contingency clause, which may take the form of a rider or attachment to the contract, provides critical protection to the buyer. Such a clause generally provides that the contract is contingent on the buyer obtaining approval for a loan containing certain characteristics, such as a thirty-year fixed-rate mortgage for $100,000 at no more than 8 percent interest, with no points. This common provision allows the buyer a certain period of time to obtain a firm written commitment for financing upon the described terms. The contingency usually lasts for thirty to sixty days, depending on the average time needed to obtain a loan commitment.

Although the buyer is required to act in good faith to obtain the described financing, which would include timely application for the loan, it allows the buyer to terminate the contract without penalty if the buyer is unable to obtain the financing within the time period and on the stated terms. Because this type of clause favors the buyer, some real estate agents insist that the buyer be preapproved by a lender, which gives the seller a degree of confidence that the buyer will not use the clause to void the contract unless some extraordinary circumstance arises.

The seller may refuse to agree to a mortgage-contingency clause. This can and does happen in a very hot seller's market, in which case there is not much the buyer can do. But the absence of a mortgage-contingency clause might mean that the buyer will be forced to finance his or her home purchase at an unfavorable interest rate. In the worst-case scenario, the buyer might be unable to obtain a mortgage and forfeit the earnest money, and perhaps even the full down payment if that is already being held in escrow pending closing. Because of this risk, buyers should be very cautious about signing a purchase contract that does not contain this clause.