The Mortgage Contingency in Real Estate Contracts

The Mortgage Contingency.  It’s nearly a page long, with fill in the blanks and so much legal mumbo jumbo that my head hurts. It is one of the most important contingencies in the real estate contract. And yet one of the most frequently misunderstood and misapplied.

In its simplest terms, this contingency states that if the buyer is unable to get a mortgage, the buyer may cancel the contract and receive their deposit back.

There are, of course, many more details than that however.  The buyer selects the terms of the mortgage they believe they will apply and qualify for.  Interest rate, type of loan, term and points all factor in.  The seller must accept the terms listed by the Buyer on the real estate contract, and should review them carefully.  If they seem unrealistic, the Seller should force the Buyer to redraft them.

If the Buyer is able to secure a loan, but it is not in accordance with the terms listed, that may be used as a denial of mortgage.   If a seller accepts a contract listing the interest rate as 1%, and the buyer gets a mortgage commitment at 4%, the buyer may terminate the contract.

There are other factors.  The mortgage commitment must be free from certain conditions.  It is imperative that the Buyer review their commitment letter, and attempt to remove as many conditions as possible.  The conditions listed in the contract are: appraisal, verification of employment, verification of Buyer assets, approval of Buyer’s creditworthiness and lender approval of a common interest community.

In some cases the Buyer does not receive a commitment letter, receives a rejection or receives one subject to the conditions listed above.  In that case, the Buyer has until the mortgage contingency date to notify the Seller of their inability to get a “clean commitment”. The Buyer must decide to either terminate the contract or continue with the contract.  If the reason for termination is a rejection, the Seller has the right to request and receive a copy of the rejection.  The same holds true for a commitment letter subject to the conditions noted above.  If the Buyer does not have a “clean commitment”,  but does not elect to terminate the contract, the seller may elect to terminate on their own.  They must do so within 7 days of the mortgage contingency date.

There are of course, many other nuances to the mortgage contingency date.  This is just a basic primer on the generalities.  If you need more information, we can set up an appointment at our Glastonbury office, or at your agent’s office in the surrounding towns of Marlborough, Hebron, West Hartford or Colchester.  We cover most of Hartford County, Tolland County and New London County.