Mortgage Contingencies in Real Estate Contracts

A contingency is a condition in a contract that must be satisfied before the contract is binding. A mortgage or financing contingency generally means that the buyer must secure the agreed to financing by the agreed to date or the contract is void. Most buyers finance their home purchases, even those who write cash offers.

Sometimes a deal without a mortgage contingency will be referred to as a “cash” deal even though the buyer is going to get a mortgage. That is because from the seller’s point of view, the buyer is obligated to go through with the deal even if she is not able to get a mortgage. (This is where a preapproval from a quality mortgage lender and earnest money are important.)

NOTE: A cash offer may look great on paper, but make sure the buyer actually has the money or the mortgage before you get to the closing table.

A mortgage or financing contingency gives the buyer a certain number of days within which to obtain a commitment from a mortgage company, for the stated amount, for the stated interest, and for the stated term of years.

For example, a mortgage for:

80% of the purchase price (expressed in a $ amount, such as $240,000, which is 80% of the $300,000 agreed to price. The buyer would be putting down $60,000 in this example.); with

An interest rate of 6.5%; for

An amortization period of 30 years.


You, as the seller, want the amount of the loan contingency to be as low as possible. (The lower the % amount of the contingency, the more the buyer has to put down.) The more the buyer has to put down, the greater the likelihood of her getting a mortgage. If you are the buyer, you want to put down the smallest amount of money. Therefore, you would want the % to be high. (Part of the current mortgage crisis is due to buyers putting down very little.)

You, as the seller, want the stated interest rate to be as high as possible. The higher the rate is in the contingency, the more likely it is the buyer will be able to get that loan.

If you are the seller, do not worry about the length of your buyer’s mortgage. The amortization term is more of a concern to the buyer than to you.

If the buyer cannot get a loan within the time stated or fails to meet any of the other requirements, the seller may, if included in your contract, have the right to try to get a loan for her.

If neither the seller nor the buyer can get a loan for the agreed-to amount and terms, then the seller must return the earnest money and the contract is null and void.

© 2007 Complete Books Publishing, Inc.