What Is a Mortgage Contingency?

Mortgage Contingency Explained

A mortgage contingency, also called a financing contingency, is a clause in a real estate purchase agreement that makes the sale conditional on the buyer obtaining mortgage financing. If the buyer cannot secure a mortgage commitment from a lender within a specified timeframe, the contingency allows the buyer to back out of the deal and get their earnest money deposit back.

Think of it as a safety net. You are entering a legally binding contract to purchase a property, but you are also acknowledging that the purchase depends on a third party, the lender, agreeing to finance it. Without a mortgage contingency, a buyer who is denied financing could lose their deposit and potentially face a lawsuit for breach of contract.

How the Mortgage Contingency Works

The mortgage contingency clause typically includes several key details:

• Contingency deadline: The date by which the buyer must obtain a mortgage commitment. This is usually 30 to 45 days after the purchase and sale agreement is signed, though it varies by market and negotiation.
• Loan terms: The type of mortgage, the maximum interest rate the buyer is willing to accept, and the loan amount. If the buyer can only get financing on terms materially worse than specified, the contingency may be triggered.
• Good faith effort: The buyer is required to apply for the mortgage promptly and provide all requested documentation. You cannot intentionally sabotage your own loan application to get out of the deal.

If the buyer receives a mortgage commitment within the deadline, the contingency is satisfied and the sale proceeds to closing. If the buyer is denied or cannot get acceptable terms, they notify the seller in writing, the contract is voided, and the deposit is returned.

The Mortgage Contingency in Massachusetts

Massachusetts has a somewhat unique real estate transaction structure. The process typically involves two agreements: an Offer to Purchase (with a smaller deposit, often $1,000) followed by a Purchase and Sale Agreement (P&S) about one to two weeks later with a larger deposit, usually 5% of the purchase price.

The mortgage contingency is included in the Purchase and Sale Agreement. The standard contingency period in Massachusetts is typically 30 to 35 days from the signing of the P&S, though this is negotiable. During this period, the lender processes the loan application, orders the appraisal, and works toward issuing a mortgage commitment letter.

In Massachusetts, the earnest money deposit is held in escrow, usually by the seller's attorney or the listing broker. If the mortgage contingency is properly exercised, the buyer gets this deposit back. The stakes are significant because the deposit at the P&S stage can be $15,000 to $25,000 or more on a typical Massachusetts home.

Waiving the Mortgage Contingency

In hot real estate markets, some buyers waive the mortgage contingency to make their offer more attractive to sellers. From a seller's perspective, a buyer who waives this contingency is signaling confidence that they can close, which reduces the risk that the deal will fall through due to financing issues.

However, waiving the mortgage contingency is one of the riskiest moves a buyer can make. Here is what can go wrong:

• Appraisal shortfall: If the property appraises below the purchase price, the lender may not approve the full loan amount. Without a contingency, you must make up the difference in cash or lose your deposit.
• Job loss or income change: If you lose your job or your income changes between the offer and closing, the lender may deny the loan. Without the contingency, you have no exit.
• Underwriting issues: Even with a pre-approval, underwriting can uncover issues. A pre-approval is not a final commitment, and problems with documentation, credit changes, or property issues can derail financing.
• Deposit forfeiture: If the deal falls through and you have no financing contingency, the seller can keep your earnest money deposit, which could be tens of thousands of dollars.

When It Might Make Sense to Waive

Despite the risks, there are situations where waiving the contingency may be a reasonable calculated decision:

• You have a strong pre-approval with full underwriting completed (not just a pre-qualification)
• You have enough cash reserves to cover an appraisal gap
• Your employment and income are stable and well-documented
• You are competing in a multiple-offer situation where including the contingency will likely result in a rejected offer
• You have consulted with your lender and feel confident about the loan closing

Even in these cases, waiving should be done with eyes wide open. Talk to your lender and your attorney before making this decision. A strong pre-approval reduces the risk but does not eliminate it entirely.

Other Common Contingencies

The mortgage contingency is one of several common contingencies in a real estate purchase agreement. Others include:

• Inspection contingency: Allows the buyer to have the property inspected and negotiate repairs or withdraw if significant issues are found
• Appraisal contingency: Protects the buyer if the property appraises below the purchase price (sometimes separate from the mortgage contingency)
• Title contingency: Ensures clear title can be delivered at closing
• Sale of existing home contingency: Makes the purchase conditional on the buyer selling their current home

Protecting Yourself as a Buyer

The best way to protect yourself when navigating contingencies is to get properly pre-approved before you start making offers. A thorough pre-approval means your income, assets, and credit have been reviewed by a lender, and you know exactly what you qualify for. This gives you the confidence to make competitive offers while understanding your true financial position.

Whether you are pursuing a conventional loan, an FHA loan, or another mortgage product, understanding how contingencies work is essential to making smart decisions during the purchase process. Your loan officer and real estate attorney should be your guides through these decisions.