Most homebuyers rely on mortgage financing to complete a purchase. But what happens if you sign a purchase contract and your financing does not come together as expected? A mortgage contingency, also called a financing contingency, may provide important protection.
This clause makes the purchase dependent on obtaining financing under the terms and deadlines stated in the contract. However, the protection is not automatic. Buyers need to understand exactly what their contract requires and meet the applicable deadlines.
What Is a Mortgage Contingency?
A mortgage contingency is a provision in a real estate purchase contract that makes the transaction contingent on the buyer obtaining specified financing.
When properly included and followed, the contingency may allow the buyer to terminate the contract if qualifying financing cannot be obtained within the required period. Depending on the contract terms and circumstances, this can also protect the buyer's earnest money deposit.
The exact rights and obligations depend on the language of the signed purchase agreement, so buyers should not assume every financing contingency works the same way.
Why Is a Financing Contingency Important?
A mortgage preapproval does not guarantee final loan approval. After a property goes under contract, the lender may still need to verify income, assets, credit, debts, insurance, the property's value, and other underwriting requirements.
A financing contingency can provide a defined path forward if the buyer cannot obtain the financing described in the contract despite making the required application and pursuing the loan in good faith.
It also establishes deadlines so the buyer and seller know when financing decisions and notices need to occur.
How Does a Mortgage Contingency Work in Florida?
Florida buyers should pay close attention to the specific purchase contract being used. For example, the Florida Realtors/Florida Bar Residential Contract for Sale and Purchase contains detailed financing provisions addressing the loan application, financing terms, loan approval period, appraisal requirements related to financing, and notices between the parties.
The contract can specify details such as the loan amount, whether financing is conventional, FHA, VA, or another type, the loan term, and applicable interest rate provisions.
These details matter. Pursuing financing that is materially different from the financing specified in the contract could affect the protection provided by the contingency.
Financing Deadlines Can Affect Your Protection
A mortgage contingency is not an unlimited right to cancel at any point before closing. Buyers generally must satisfy specific contractual deadlines.
Under the commonly used Florida Realtors/Florida Bar contract, buyers agree to apply for financing within the period stated in the contract and use good faith and diligent effort to obtain approval. The contract also establishes a Loan Approval Period.
If loan approval has not been obtained, the buyer may need to provide written notice before the applicable deadline to preserve certain rights. Extending the closing date does not automatically extend the financing or loan approval deadline.
Does a Mortgage Contingency Protect Your Earnest Money?
It can, but buyers should avoid assuming their deposit is protected under every financing scenario.
If a buyer properly exercises a financing contingency according to the purchase contract, the deposit may be refundable. If the buyer misses a required deadline, fails to provide required notice, or waives the contingency, the result can be very different.
Earnest money can represent a significant amount of cash, which makes understanding the financing language before signing the contract especially important.
What Happens if the Home Appraises Below the Purchase Price?
A financing contingency and an appraisal contingency are not necessarily the same protection.
In the Florida Realtors/Florida Bar financing provision, the lender's satisfaction with an appraisal or alternative valuation can be part of obtaining Loan Approval when one is required. A separate appraisal contingency, however, can provide different contractual rights when an appraisal falls below an agreed value.
FHA and VA transactions may also include additional appraisal language or riders that affect the buyer's obligations. Buyers should understand which protections are actually included in their contract.
What Happens if You Waive the Mortgage Contingency?
Waiving a financing contingency can make an offer appear less dependent on financing, but it also increases the buyer's financial risk.
If the mortgage is later denied, the buyer may still be contractually obligated to complete the purchase. Depending on the contract and circumstances, failure to close could put the earnest money deposit at risk and potentially create other contractual consequences.
Before waiving a financing contingency to make an offer more competitive, understand how you would complete the purchase if financing becomes unavailable.
Can You Customize a Mortgage Contingency?
Financing terms in a purchase contract can address several important details. Depending on the contract, these can include:
- The mortgage type, such as conventional, FHA, VA, or other financing
- The amount or percentage being financed
- The loan term
- Interest rate provisions
- The deadline for applying for financing
- The loan approval period
Because these are contractual provisions with potential legal consequences, questions about how to draft, modify, waive, or enforce a contingency should be directed to a qualified real estate attorney or other appropriate professional.
Get Preapproved Before Making an Offer
A mortgage contingency provides protection, but preparation before making an offer is equally important. Getting preapproved can help identify potential financing issues and establish a realistic homebuying budget.
Once under contract, respond promptly to lender requests and avoid unnecessary financial changes. New debt, employment changes, large purchases, or unexplained movement of funds could affect underwriting and delay or jeopardize loan approval.
The Bottom Line
A mortgage contingency can be an important safeguard when purchasing a home with financing. It can establish clear financing requirements and may protect your earnest money if you cannot obtain the specified mortgage and properly follow the contract's procedures.
The key is understanding the exact language and deadlines before signing. Do not assume a preapproval guarantees financing, that every appraisal issue is covered, or that extending the closing date automatically extends your financing deadline.
Loan Wolf Lending can help Florida homebuyers prepare for mortgage financing before making an offer and work through the loan process after going under contract. Call 754-755-3075 to discuss your home financing options.