The Mortgage Financing Contingency Clause

Real estate sales are usually subject to many contingencies, and the mortgage financing contingency is one that often causes considerable headaches for buyers and sellers. At the most basic, a mortgage contingency clause says that if a buyer cannot secure a firm loan commitment within a specified time, then the buyer can cancel the purchase and get the deposit returned. If problems arise, usually the buyer’s only choice is to ask for an extension or cancel the sale and look for a different property.

However, it is vital to pay attention to the details. Attorneys for the buyer or the seller can include provisions to protect their clients, including:

  • A longer-than-usual time to obtain a loan commitment.
  • Automatic termination of the contract if the seller does not agree to an extension
  • A definition of “diligent efforts” to obtain a mortgage that limits a buyer’s obligation to one application or allows them to terminate an agreement if the mortgagor applies unreasonable or uncontrollable conditions
  • The option to terminate if the buyer’s rate lock expires while the seller is attempting to cure a title defect

It is also important to be aware that even standard real estate contract provisions can favor one party over the other. For instance, a passive loan contingency clause that closes escrow unless the buyer notifies the seller of the failure to obtain a loan commitment can easily result in a lost deposit if the buyer forgets about the financing deadline.

The bottom line is that whether you are the buyer or the seller, it is important to understand all the terms and contingencies in your real estate contract before signing and know whether those terms are favorable or even realistically achievable. Working with an experienced real estate attorney during the sale can prevent a number of costly problems and help you secure advantageous terms in the transaction.