Legal Definitions - mortgage-contingency clause

A mortgage-contingency clause is a specific condition written into a real estate purchase agreement. This clause makes the buyer's obligation to complete the purchase dependent on their ability to secure a mortgage loan within a specified timeframe and under certain terms. Essentially, it provides a legal "out" for the buyer if they are unable to obtain the necessary financing, allowing them to withdraw from the contract without penalty and typically recover any earnest money deposited.

Here are some examples illustrating how a mortgage-contingency clause works:

• Example 1: First-Time Homebuyer Protection

  Sarah is a first-time homebuyer who has saved diligently for a down payment but needs a substantial loan to afford her desired house. Her purchase agreement includes a mortgage-contingency clause stating that she must secure a conventional loan for at least 80% of the home's value at an interest rate no higher than 6.5% within 21 days. If, after applying to multiple lenders, her loan application is denied, or if the best loan offer she receives is at 7% interest, the clause allows her to terminate the purchase agreement. This protects Sarah from being legally bound to buy a home she cannot financially afford or finance under acceptable terms, ensuring she gets her earnest money back.

• Example 2: Specific Loan Requirements for an Investment Property

  Mark is an experienced real estate investor looking to purchase a multi-unit property. He has a specific financial model for the property's profitability that relies on securing a 15-year fixed-rate commercial mortgage. His offer includes a mortgage-contingency clause specifying that he must obtain this exact type of loan with an interest rate not exceeding 7.0%. If, during the contingency period, lenders are only offering 30-year loans or loans with higher interest rates due to market changes, the clause permits Mark to cancel the contract. This ensures he only proceeds with the purchase if he can secure financing that aligns with his investment strategy.

• Example 3: Relocation and Uncertainty

  The Chen family is relocating for a new job opportunity and found a house they love. However, their new employment is contingent on a final background check, which could slightly impact their loan approval. To mitigate risk, their offer includes a mortgage-contingency clause requiring them to obtain a 30-year fixed-rate mortgage for $500,000. If, within the stipulated 25-day period, a lender denies their application due to the pending background check or offers a loan amount significantly lower than $500,000, the clause allows the Chens to walk away from the deal. This provides them with crucial protection, ensuring they are not committed to buying a home if their financial situation or loan eligibility changes unexpectedly.