A mortgage contingency, also called a financing or loan contingency, is a clause in a home purchase contract that makes the deal contingent on your securing a mortgage.
Your purchase contract sets the terms, and missing its deadlines could cost you your earnest money. It’s important to review the contingency clause closely, ideally with your agent or a real estate attorney.
What a mortgage contingency does (and why it exists)
A contingency is a condition written into a purchase contract that has to be met before the purchase can be completed. A mortgage contingency clause, also called a financing contingency, gives you a specified period to secure a mortgage.
Between your offer being accepted and closing, your mortgage lender verifies your employment, income, assets, debts, and credit history through a process called underwriting. Your lender also arranges a professional appraisal, if required, to determine whether the property’s value supports the loan amount.
If the financing contingency isn’t met within the time outlined in the contract, you can generally back out without penalty, provided you’re acting in good faith and follow the contract’s terms and notice requirements.
Your contract should clearly explain the financing requirements and spell out the deadlines for meeting them.
Keep in mind that the financing contingency deadline is not your closing date. The contingency deadline usually comes first and applies to your financing, while closing is when the sale is finalized and ownership transfers.
Examples of what can trigger a mortgage contingency
There are a few ways that a mortgage contingency clause might come into play.
- Your lender denies your loan, or you can’t secure a mortgage within the period your contract allows.
- Your finances change after you apply. Your lender may check your credit and employment status again shortly before closing. A job loss or additional debt could affect whether you still qualify for the loan.
- The home appraises for less than the purchase price. Lenders generally base the loan amount on the lower of the purchase price or appraised value. If the appraisal comes in low, your lender may not lend you the full amount you requested. Your options in this situation generally include negotiating a lower price, increasing your down payment, or, depending on your contract, walking away from the sale. Whether a low appraisal triggers your financing contingency or a separate appraisal contingency depends on your contract.
Releasing or waiving a mortgage contingency
Releasing a mortgage contingency means giving up the protection that clause provides if your financing falls through. You could lose your earnest money and face other legal consequences if you cannot complete the purchase, depending on your contract and state law.
Releasing and waiving a contingency are closely related. Waiving usually means leaving the contingency out of your offer from the start, while releasing means removing it after the contract is signed, often once your lender confirms your approval. Either way, you lose the protection.
Whether you have to release a contingency in writing or it simply expires at the deadline depends on your contract and state, so confirm the mechanics with your agent or a real estate attorney before the date passes.
Releasing before you have final loan approval means taking on the risk that unresolved underwriting conditions could prevent you from getting the loan. A separate appraisal contingency may still offer protection if the appraisal comes in low.
Why buyers release or waive the contingency
The financing contingency is built to end. Before closing, you either confirm your financing is on track and move forward, ask the seller for more time, or cancel. Depending on your contract, you may need to release the contingency in writing before moving forward.
In a competitive market, a buyer who waives or releases the financing contingency may appear less risky to a seller who is weighing several purchase offers, which can help an offer stand out.
Sellers or their agents may also ask you to release a mortgage contingency once your loan looks secure, since doing so removes financing as a reason the sale could be canceled.
Should you release or waive your mortgage contingency?
Waiving the contingency may be more manageable for buyers with a strong, well-documented preapproval and ample savings beyond the down payment and closing costs. A competitive market may give buyers more reason to consider it, but it doesn’t reduce the risk.
A waiver is harder to justify if your down payment is stretched, your income or credit profile has any open questions, or the appraisal could come in low.
Other middle-ground options can strengthen an offer without giving up all protection, such as shortening the contingency window or offering a larger earnest money deposit. A shorter window gives you less time to secure financing, while a larger deposit increases the amount you could lose if you breach the contract.
Because a waiver puts your deposit and potentially more at stake, it is worth talking through with both your lender and your agent before you commit.
How much earnest money is at risk?
Earnest money is a good-faith deposit you make once you sign a contract to buy a home, and it typically runs 1% to 3% of the purchase price.
On a $300,000 home with a 2% deposit, that is $6,000 held in escrow.
What to confirm with your lender before you release the contingency
If you’re considering releasing your contingency, confirm where your loan stands first. Here are the top questions to ask your lender:
- Can you provide a loan commitment, conditional approval, or other written confirmation of my loan’s status?
- What must still happen before closing?
- Are any underwriting conditions still outstanding?
- Does my loan require an appraisal? If so, do you have the appraisal results, and does the value support my loan amount?
Your lender can explain where your loan stands, but you may need to decide whether to release the financing contingency before you receive final loan approval.
What happens if you miss the deadline or the loan falls through?
If your lender denies your loan before the deadline, you can often cancel under the contingency and recover your earnest money, as long as you follow the contract’s terms.
If you need more time to secure financing, you can ask the seller for an extension. Get any agreed extension in writing. Keep in mind, the seller does not have to agree.
You could also try a different lender before the deadline, though a new application may be hard to complete within a short window. Letting the date pass without acting could put your earnest money at risk.
Understanding other home purchase contingencies
In addition to a mortgage contingency, your home purchase contract may include other contingencies. Some of them may overlap. For example, a mortgage contingency addresses financing, and an appraisal contingency addresses the risk that the home appraises below the purchase price, but a low appraisal can also impact mortgage approval. The inspection contingency is another common addition to the contract that addresses property-condition concerns.
Many buyers choose which contingencies to keep or waive separately, so waiving one does not mean waiving all.
The takeaway
A mortgage contingency can help protect your earnest money if your loan falls through. Whether to keep it or waive it depends on how secure your financing is, how much financial risk you can afford to take, and how competitive your market is.
Before you make an offer, confirm the contingency dates with your agent and keep your lender updated on every deadline.
Frequently asked questions
Do I need a mortgage contingency if I’m already preapproved?
Yes, you should still consider a mortgage contingency even if you have a preapproval since it is not the same as final loan approval. Lenders can still change course based on underwriting, the appraisal, or changes to your finances, so a contingency can still protect you after preapproval.
Does a mortgage contingency work differently for FHA, VA, USDA, and conventional loans?
The basic concept of a contingency is similar across loan types, but details can vary by contract and loan program. Some government-backed loans have appraisal-related protections built in. For example, VA purchase contracts include an escape clause tied to the property’s reasonable value as established by the VA, and FHA purchase transactions typically include an amendatory clause in covered cases. Because both program rules and contract language matter, confirm the specifics with your lender, agent, or a real estate attorney.
Should I accept a contingent offer on my house?
A contingent offer can be a reasonable choice if a buyer is strongly qualified, the contingency window is short, or the offer is otherwise attractive on price and terms. Sellers should weigh the added uncertainty against the rest of the offer.
How long does a mortgage contingency last?
Mortgage contingencies typically last 30 to 60 days, but your purchase contract sets the deadline. You can request an extension if you need more time to secure financing, though the seller does not have to agree.