Mortgage Contingency

A mortgage contingency (also called a financing contingency or loan contingency) is a clause in a real estate purchase agreement that conditions the buyer's obligation to complete the purchase on the buyer successfully obtaining a mortgage loan meeting specified terms — typically a minimum loan amount, maximum interest rate, and loan type. If the buyer cannot secure financing by the contingency deadline (typically 21–30 days from contract), the buyer may cancel the contract and receive their earnest money deposit back. Without a mortgage contingency, a buyer who cannot obtain financing forfeits their earnest money and may face legal liability. Mortgage contingencies are standard in most US real estate contracts. In competitive markets, some buyers waive the contingency to make their offer more attractive — a high-risk strategy unless they have a backup source of funds. See earnest money glossary and the CFPB home buying process guide.

A mortgage contingency provides two key protections: (1) Earnest money recovery: If financing falls through for reasons within the contingency (lender denial, inability to secure the specified loan terms), the buyer can cancel and receive their earnest money deposit back — typically 1–3% of the purchase price ($5,000–$30,000+); (2) Contract termination right: The buyer can exit the contract without penalty if the contingency condition is not met. What the contingency typically specifies: minimum loan amount, maximum interest rate, loan type (conventional, FHA, VA), and a deadline for approval. Important: the contingency is not unconditional protection against all financing issues. If the buyer deliberately sabotages their own approval (e.g., quits their job, takes on new debt), most contracts allow the seller to retain the earnest money. Good faith effort to obtain financing is expected. See earnest money, LTV ratio, and the CFPB closing process.

These are two distinct but related contingencies: Mortgage contingency (financing contingency): Protects against inability to obtain a loan — lender denial, rate change, property type disqualification. Triggered if the lender will not approve the loan at all. Appraisal contingency: Protects specifically against the appraisal coming in below the purchase price. If the appraised value is lower than the contract price, the buyer can renegotiate, request the seller lower the price, or cancel. Without an appraisal contingency, the buyer must cover the "appraisal gap" — the difference between the contract price and the appraised value — in cash. Example: Contract price $550,000; appraised value $520,000; gap = $30,000 the buyer must pay in addition to the down payment. These contingencies can exist together or separately. Many buyers waive the appraisal contingency (especially in hot markets) while keeping the mortgage contingency. See home appraisal glossary and CFPB — What is an appraisal?.

Waiving a mortgage contingency is a significant risk but is sometimes appropriate: Safe to waive when: (1) You are a cash buyer using the mortgage as a convenience — you have sufficient liquid assets to purchase without financing if needed; (2) You have a fully approved mortgage (not just pre-approval) before making the offer — unusual but occurs when buyers are ready in fast markets; (3) You are making an all-cash offer and adding a mortgage to recoup capital after closing ("delayed financing"); (4) Your financial situation is rock-solid — strong credit, stable income, significant reserves, and the property is standard (no unusual condition, type, or valuation issues). Risky without strong justification: Waiving with only a pre-approval letter exposes you to earnest money loss if the full underwriting reveals issues. New debt, job changes, or appraisal problems between pre-approval and closing can derail financing. Get fully underwritten before waiving. See mortgage pre-approval vs. pre-qualification and the CFPB pre-approval guide.

If the mortgage contingency deadline passes without the buyer invoking it, and financing later falls through, the buyer is in breach of contract: (1) Earnest money forfeited: The seller typically retains the earnest money deposit as liquidated damages; (2) Potential lawsuit: In some contracts and jurisdictions, the seller may sue for specific performance (force the buyer to purchase) or additional damages beyond the earnest money; (3) Possible extensions: Buyers in good faith can request a contingency extension if underwriting is taking longer than expected — sellers may agree, especially if no backup offers exist. Best practice: if you need more time for underwriting, ask for a contingency extension before the deadline — do not just let it expire. A lender-issued "commitment letter" (not just pre-approval) before the deadline is the strongest protection. See earnest money glossary and CFPB — Understanding your closing.

Yes — Canadian real estate contracts include financing conditions that function similarly to US mortgage contingencies, though terminology differs: Condition on financing: Standard in most Canadian real estate offers. The buyer has a specified number of days (typically 3–7 business days in most provinces) to satisfy the financing condition. If not satisfied by the deadline, the contract is void and the deposit is returned. Subject to financing (BC): British Columbia uses "subjects" — conditions the buyer must remove to firm up the deal. A subject to financing is removed once the buyer confirms approval. Condition precedent: Legal term for the condition that must be met before the contract is binding. Canadian financing conditions are typically shorter than US contingency periods — a 5-business-day financing condition is common in competitive markets. The tight timelines mean having lender pre-approval before making an offer is especially important in Canada. See mortgage pre-approval and the FCAC home buying guide.