What does contingent mean on a house?

Before rolling out the welcome mat at your new house, a lot of moving parts have to fall into place—including your mortgage. A mortgage contingency clause, sometimes called a financing or loan contingency, is essentially a clause in your real estate contract. It gives you, the buyer, a set amount of time to secure loan approval. Think of it as a grace period to ensure that your financing is on track.

Now, why is this little clause so important? Because, if you can't secure a loan in the agreed upon time frame, it allows you to back out of the deal without losing your earnest money deposit. Earnest money is what you pay upfront to show the seller you're serious about buying and what ties you to the purchase agreement’s terms. If there were no mortgage contingency in play and your loan fell through, you would lose your dream home and your earnest money deposit. You might even face legal action for backing out of the deal.

When you put an offer on a house and include a mortgage contingency, you're essentially saying, "I really want to buy this house, but I need a little time to make sure I can get the loan to pay for it."

Here’s how a mortgage contingency works: Your offer gets accepted (hooray!) and you negotiate a purchase agreement which includes a mortgage contingency clause. Once you and the seller sign the purchase agreement, you’ll make your earnest money deposit, and the contingency period begins. Your lender will review your financials and work on giving you the green light for your mortgage, and if everything goes according to plan, you’ll get a mortgage commitment letter.

Here’s where the magic of a mortgage contingency comes in: if your financing doesn’t come through before your deadline, you can walk away from the deal without losing your earnest money.

For the seller, a mortgage contingency isn't about waiting around. It's a reassurance that you're actively working to get the loan and that you're serious about buying their property. If you do get your loan and everything looks good, you, your lawyer or your real estate agent will need to formally remove the contingency, either by telling the seller directly or just letting the deadline pass, showing that all conditions have been met.

You don’t have forever to get that go-ahead from your lender. Usually, your mortgage contingency gives you about 30 to 60 days to secure your loan. In some cases, you might be able to land an extension, but that will depend on your situation and whether your seller is open to it.

Mortgage contingencies aren’t the only hurdles you’ll run into on your way to getting your dream digs. A standard purchase agreement usually includes other protections that give you the chance to back out of buying if things don’t go quite according to plan.

• Home inspection contingencies: During your home inspection, there’s always a chance that something major could pop up that you’re not prepared for. If you choose not to negotiate repairs with the seller, this contingency gives you the option to walk away scot-free.
• Appraisal contingencies: If your property’s appraisal value doesn’t line up with what you’ve agreed to pay, you’re not locked into your contract. If you don’t want to go back to the seller, thanks to this contingency, you can walk away with your earnest money still in hand.
• Title search contingencies: If the title search pulls up any liens or other problems, this contingency lets you back out without worrying about losing your money.
• Home sale contingencies: This type of contingency makes buying your new home dependent upon selling your old one. If your house is still stuck on the market after a set period, you can press pause on your plans for a new place without taking a financial hit.

When it comes to the details of your mortgage contingency, both you and the seller should be on the same page. Let’s break down what you’ll be looking at.

Mortgage contingency deadline

This keeps things moving along by establishing that 30- to 60-day deadline for loan approval. If your mortgage isn’t approved by then, you won’t have to worry about any penalties.

Type of mortgage

Your mortgage contingency clause will mention the type of loan you’ve got to secure, whether it’s a conventional loan or a government-backed loan, like an FHA or VA loan.

Mortgage approval amount

The clause will also break down the loan amount you’ll need to get approved for. If you can’t hit that number, your contract can be canceled without any consequences.

Maximum interest rate

This part includes the maximum interest rate you’re willing to pay. If your loan gets approved with a higher number, you can back out without losing your earnest money.

Closing or origination fees

These are the upfront costs you’ll be responsible for should your loan go through, including closing or origination fees.

While you always have the option to waive a mortgage contingency—and other real estate contingencies—it’s probably not a good idea, depending on the market you’re in. Contingencies are there to help protect you from the unknowns that come with buying a home.

If you’re in a buyer’s market where you have the upper hand, there isn’t much reason to waive the mortgage contingency. On the flip side, if you’re in a competitive seller’s market, waiving it could make your offer stand out because it basically says, “I don’t need financing.” Risky indeed. Before you make that call, carefully weigh your options and check out the other ways you can win a bidding war.

Saying goodbye to your mortgage contingency is something you should only think about if you’re confident you can lock in financing and you’re committed to buying the property. If you waive your contingency and your loan falls through, you can lose your earnest money and even be sued by the seller for breach of contract. On the other hand, keeping it in place gives you one less thing to stress about during the whole home-buying process.