Proper home purchasing contracts have a contingency clause or conditions that must be met before the parties close the deal. A loan contingency protects the house buyer from unintended financial and legal repercussions arising from an inability to get financing. Since there is no standard loan contingency clause, use a lawyer to negotiate terms and provisions with the seller for you.
How a Financing Contingency Works
A contingency offer means you have placed an offer on a home, and the seller has accepted it, but you will only close the deal when certain criteria are met. Under the loan contingency, the seller allows you a specified time to get a loan to cover the purchase. If you do not get a lender to commit by the set date, you walk away from the sale without penalties, and you get your down payment back.
Active Removal of a Contingency Clause
Contingency removal varies from one contract to another. Active removal – which requires more paperwork – can, in theory, ensure a buyer’s protection beyond the contingency deadline. Under active removal, the buyer actually must ask in writing for the contingency to be removed. For example, if the clause allows the customer ten days to remove a loan contingency, it protects the buyer until he asks for it to be removed, even if it is beyond the ten-day period. The seller cannot unilaterally act and remove the contingency, but he does have the right to ask the buyer to communicate about the status of the loan application.
Passive Loan Contingency Removal
Passive removal is like an alarm clock – it goes off at the stated time, even if the buyer needs more time. For example, if the contingency states that a buyer will notify the seller of failure to obtain a loan 20 days before the closing date, by default the contingency expires if the buyer does not communicate in time. In this case, the buyer is bound by the agreement and cannot cancel the purchase offer without a penalty. The results, depending on your purchase agreement, can be serious problems such as forfeiting your deposit or facing lawsuits to compensate the seller for the time he took his house off the market.
Other Important Considerations
Include all of your contingencies as part of the purchase offer and ensure the seller agrees to the terms before signing the agreement. Removing your loan contingency makes your offer more attractive because it signifies your commitment to buy a house, but it is a potentially perilous decision. Consider all possible outcomes such as delayed funds or losing your job before waiving the contingency.
- Free Advice: Mortgage Contingency Clause in Real Estate Home Purchase Contract
- NOLO: Contingencies to Include in Your House Purchase Contract
- The Washington Post: Should You Waive the Financing Contingency?
- North Carolina Real Estate Commission. "Questions and Answers on: Offer and Acceptance." Page 4. Accessed May 31, 2020.
- National Association of Exclusive Buyer Agents. "Complete Guide to Buying a House." Accessed May 31, 2020.
- Realtor.com. "What is Earnest Money and How Does It Work?" Accessed May 31, 2020.
- National Association of Exclusive Buyer Agents. "What Is the Mortgage Contingency Clause and Why Is It a Bad Idea to Waive It?" Accessed May 31, 2020.
- California Association of Realtors. "Contingencies and Cancellation." Accessed May 31, 2020.
- American Financing. "What is a Mortgage Contingency Agreement or Clause?" Accessed May 31, 2020.
William Dailey is well-versed on local and international aﬀairs with sound financial, economic and business knowledge. He is an MBA and Business Administration graduate from the Kingston University and The London School of Business and Finance, respectively. William has been writing professionally since 2011.