In a real estate contract, the financing contingency is a provision that allows the buyer to terminate the contract if they fail to obtain mortgage approval and funding for the purchase price within a specified time.
Not all home financing contingencies are created equal, however. Depending on the region and local real estate customs, such contingencies can vary greatly, particularly when non-MLS forms or addenda are used, or other local or state promulgated forms are not used, for example, when an attorney creates the contract, or when a home builders purchase and sale contract is utilized instead. Some contracts even stipulate the financing rate.
Its important to understand the financing contingency before submitting any offers to purchase property. There are several reasons you should be aware of this important real estate contract clause before making any commitment. What may happen if deadlines pass or loan applications arent accepted.
Purchasing a home is likely one of the biggest financial decisions you’ll ever make. And for most buyers, securing financing is an essential part of the process. That’s where a loan contingency clause comes in. A loan contingency gives buyers time to obtain a mortgage, while also providing an escape hatch if financing falls through. When crafting this clause, one key detail is the length of the contingency period. Many lenders recommend allowing 14 days. Here’s what homebuyers should know about including a 14 day loan contingency.
What is a Loan Contingency?
A loan contingency also called a mortgage or financing contingency is a common clause included in real estate purchase contracts. This provision gives the buyer a set number of days to secure financing for the home purchase. If the buyer can’t obtain a mortgage within that timeframe, they can back out of the contract and get their earnest money deposit returned.
The loan contingency provides protection to the buyer, who would otherwise be obligated to close on the home even if they end up not qualifying for a mortgage. It reduces the risk of losing your deposit if you ultimately can’t secure a loan.
Key Parts of a Loan Contingency
There are a few key details that go into crafting a loan contingency
-
Contingency deadline: The number of days the buyer has to obtain financing, such as 14 days.
-
Type of mortgage: The specific loan the buyer needs to qualify for, like a 30-year fixed-rate mortgage.
-
Loan amount: The required mortgage amount the buyer must be approved for.
-
Interest rate cap: The highest interest rate the buyer is willing to accept.
-
Origination fees: Lender fees the buyer is obligated to pay when securing the loan.
The lender, loan amount, and deadline are typically non-negotiable. But the interest rate cap and origination fees may be open for discussion.
Why Choose 14 Days?
Most mortgage contingencies range from 30 to 60 days. But many lenders actually recommend a shorter 14 day window. Here’s why this timeframe makes sense:
It puts a fire under the buyer. With just two weeks to secure financing, the buyer is motivated to promptly complete their application and provide all required documentation to the lender. This helps ensure the mortgage process moves along quickly.
The buyer’s credit and finances are fresh. Within a 14 day span, the buyer’s credit score and debt-to-income ratio are unlikely to change in any significant way. But over 30-60 days, new debts or credit inquiries could hurt their mortgage eligibility.
It keeps the seller happy. A shorter contingency gives the seller confidence that this won’t drag out the closing process. This makes the buyer’s offer more appealing compared to those with longer contingencies.
It fits lender expectations. Most lenders can comfortably complete underwriting and approve a buyer’s mortgage within a 14 day timeframe, assuming no issues crop up. Any longer than that is often unnecessary.
The buyer can extend it if needed. If unexpected delays arise, the buyer can still negotiate a contingency extension with the seller later on. This retains the option for a longer timeline.
While 14 days is often ideal, make sure to consult your real estate agent and lender on the timing that works for your specific situation.
The Mortgage Process During the Contingency
Once the purchase contract is signed, the 14 day loan contingency clock starts ticking. Here are some steps buyers should take to secure financing within the timeframe:
-
Submit loan application ASAP: Complete the mortgage application and provide required documents within 1-2 days of the contract being accepted. This gives the lender adequate time to process the application.
-
Stay in close contact with your lender: Provide any additional documentation requested right away. Clearly communicate any changes or issues that arise.
-
Lock your interest rate: To help ensure you get the rate agreed upon in the contract, lock in your rate soon after starting the application process.
-
Get pre-underwriting contingency removal: Ask your lender to pre-underwrite your mortgage and remove the contingency as soon as possible once you’ve obtained approval. This provides assurance to the seller.
-
Request an extension if needed: If the lender needs more time for final approval, promptly negotiate an extension to the contingency period and get written consent from the seller.
-
Cancel the contract if financing falls through: If you ultimately can’t secure a mortgage, exercise your right to cancel per the contingency clause. Get your deposit back and start the home search again.
Are There Any Risks?
While a 14 day loan contingency offers advantages, there are a couple risks to note:
-
Rushing the mortgage process: Trying to complete the loan too quickly can lead to mistakes and overlooked issues that could jeopardize your financing. Be organized but don’t sacrifice care and diligence just to meet the deadline.
-
Being unprepared if financing falls through: Because you have limited time to secure the mortgage, you’ll need to act right away if the loan doesn’t work out. Line up a Plan B for financing or search for another home.
-
Asking for too many contingencies: In a competitive housing market, having many contingencies can make sellers less likely to accept your offer over other buyers.
Overall though, the benefits of a 14 day contingency often outweigh these potential downsides in most home purchase situations.
Alternatives to Consider
While a 14 day loan contingency is common, some alternatives exist:
-
Pre-approval letter: Get pre-approved before making an offer to show sellers you can secure financing. Then waive the contingency.
-
21 day contingency: Extend to three full weeks to allow a bit more breathing room.
-
Escalation clause: Win competitive bids by including an escalation clause that auto-increases your offer price up to a set limit.
-
Buyer-friendly state laws: In some states, buyers can typically back out and get the earnest money deposit returned even without a financing contingency.
-
Seller motivations: If the seller has urgency to close, you may successfully negotiate waiving the contingency requirement altogether.
Talk to your real estate agent and mortgage lender about which option best aligns with your needs and market conditions.
Putting it All Together
A 14 day loan contingency offers homebuyers a reasonable timeframe to apply for and obtain mortgage financing, while still moving quickly enough to satisfy sellers. Make sure to act promptly, communicate with your lender, and have a backup plan in case the mortgage falls through. When used strategically, this contingency can help ensure you secure the keys to your new home.
How Does a Home Loan Contingency Work?
Also known as a mortgage contingency clause, the financing contingency is designed to protect the seller and the buyer in a real estate transaction.
With a financing clause in the sale agreement, sellers are protected if the buyer cant get a home loan within a stated time frame; the contract is voided. This protects the seller by allowing them to back out of the home purchase agreement and make a new deal with a different buyer.
As the buyer, you are protected if you dont close on your house by a certain date because otherwise, you could be in breach of contract and may lose your deposits and earnest money deposit made toward the purchase price. If, as a buyer, you cannot get final approval on the loan by the stated deadline, then you most likely may be able to back out of the purchase and receive your earnest money payment back.
However, keep in mind that this type of contingency works differently by region and depending on whats written in the contract. Some purchase and sale agreements contain more seller-friendly clauses, while others lean towards protecting the buyer more. This is why its important to have an experienced real estate agent working to help guide you through the transaction.
How Long is a Home Financing Contingency?
The length of a mortgage contingency depends on how long it takes to close on a home loan, and local real estate market customs may also influence it. For example, its not uncommon for the mortgage contingency to last through closing in some locations, while in others, real estate agents may recommend a customary term such as 14 days.
It will likely take some time for lenders to get back to you after theyve reviewed your application. For instance, it can take longer for an application to get approved if there’s a holiday during which people aren’t working. Delays are common, and a longer contingency period can help protect against the seller forcing you to walk away from the contracts. Furthermore, you may find that even though you obtained a pre-approval letter, your mortgage application ends up being denied. If this happens, you would still have time to arrange for alternative financing before the contingency expires.
Can a loan contingency be extended? The short answer is usually “yes,” except the seller must agree in advance. The answer depends on the conditions that were agreed to in the contract.
Remember that all real estate clauses are negotiable. Its important to understand what happens during this time period because you could be at financial risk if you do not abide by the contract terms. If you think you will need more flexibility in obtaining financing, try to negotiate a longer time period.
17 Day Loan Contingency Removal. What is it?
FAQ
How long should a loan contingency be?
What is a 21 day financing contingency?
What is the contingency clause for a loan?
What is a 17 day contingency?
What is a loan contingency?
It specifies the type of loan you intend to secure, the time frame for obtaining approval, and the maximum interest rate you’re willing to accept. By including a loan contingency, you’re essentially saying, “I’ll buy this home, provided I can get the necessary financing under terms I can manage.”
How long is a loan contingency period?
The loan contingency period is typically contracted to last 30 – 60 days and must be agreed on by the buyer and seller in a purchase contract. The buyer is usually expected to secure financing and gain approval for a mortgage before closing on the house can begin.
What is a mortgage contingency date?
What the mortgage contingency date represents: This date marks the deadline by which you must secure mortgage approval, not just mortgage prequalification. It’s a critical checkpoint in the homebuying process, ensuring you’re not legally bound to purchase without confirmed financing.
What is a mortgage contingency in a purchase offer?
A mortgage contingency in a purchase offer is a pivotal clause for both buyers and sellers in a real estate transaction. It gives you, the buyer, a set period to secure a mortgage loan. If you’re unable to obtain financing within this timeframe, the contingency allows you to back out of the deal without losing your earnest money.