The Mortgage Contingency Clause

If you are buying a home, you probably will need to get mortgage financing to supply a substantial part of the funds.  The contract you sign needs to give you the time you need to obtain a mortgage commitment, or if your search for a mortgage is unsuccessful, the opportunity to cancel the contract and have your downpayment returned.  The provisions permitting you the time and opportunity to obtain the mortgage is commonly referred to as the “Mortgage Contingency Clause.”  

Follow the terms: The point to remember about a “Mortgage Contingency Clause” is that its terms should thought of as a limited exception to the unconditional obligation a buyer has to purchase the property.  So, to take advantage of the opportunity presented by the contingency clause, you should be very clear what obligations you have under the clause.  What this means is, for instance, if the clause you negotiated requires application to two institutional lenders within 5 days of the signing of the contract, you should apply to 2 institutions, not 1, and make sure the applications are made within 5 days of the signing of the contract..  You should also be sure to apply for a mortgage consistent with the terms spelled out in the contract, i.e., a 15 year or 30 year term, an interest rate consistent with the terms spelled out in the contingency clause.

The consequence for failing to comply with the terms of the contract can be catastrophic.  If, for example, you don’t apply to that second institutional lender and you cannot get the mortgage you applied for with the first lender, you are at significant risk of being held to the contract and forced to close, with or without getting a mortgage.  

Watch the time limits:  The contract of sale will usually provide for a limited amount of time by which you can obtain a mortgage commitment.  It should be at least 30 days and preferably 45 days.  You should take this time limit seriously.  Your attorney should be in communications with you as the mortgage application process proceeds to make sure the application is being considered and that an answer will be forthcoming within the time provided in the contract.

In this very busy real estate market, many bank mortgage origination departments are overwhelmed, and as a result the application process can take longer than expected.  If you find yourself in this position, it is extremely important that you ask for and receive additional time to get the commitment.  If, ultimately, you are unable to get a mortgage commitment, your attorney should make sure that the seller is promptly notified within the time provided in the contract so that you can get your downpayment returned to you without any reason for the seller to hold it.

If you run into problems:  What is obvious is that the Mortgage Contingency Clause is a limited opportunity for a buyer to obtain needed financing.  The terms of the clause must be closely observed and followed.  And, above all, the buyer and his attorney must remain in contact so that problems in obtaining the mortgage do not become disasters.  A buyer, therefore, needs to select an attorney knowledgeable in the purchase process and able to keep track of time limitations so that his interests are protected in the event obtaining the mortgage becomes a problem.

Our firm would welcome the opportunity to speak with you about representing you in the purchase of your next home.

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                                                           List of Real Estate Topics

Residential Real Estate from the Buyer's Viewpoint    The Real Estate Broker-Buyer Relationship

The Real Estate Contract of Sale                                     The Mortgage Contingency

Title Issues in Purchasing Your Home

Copyright © 2007 STEPHEN C. SILVERBERG, PLLC  All rights reserved.
Last modified: December 27, 2007

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