Loan Contingency

Updated 4 months ago ​by Aneesah Emeka

What it is: 
A clause (also known as a mortgage contingency) in an offer contract that allows a buyer to back out of a deal and keep their deposit if they are unable to secure a mortgage with specified terms during a fixed period of time. 

Although it is not required, anyone entering into a home purchase contract that involves financing should include a loan contingency clause. Otherwise, you might be left in a tough spot if your financing falls through, and you would be required to proceed with the purchase or, at the very least, lose your earnest money deposit. 

What it's good for: 
If you want to buy a house but are in the middle of locking a mortgage, this clause will allow you to still make an offer. 

What to know: 

  • Standard loan contingency periods are 21 days, but can be adjusted up or down. 
  • As with other contingencies, sellers prefer shorter periods. 
  • Consult with your lender if you plan to shorten this deadline. They'll know best how quickly they can approve your loan.
  • Remember, pre-approval is only preliminary. 
    Just because you are pre-approved for a mortgage doesn’t necessarily mean you will get it. In order to get pre-approved, a lender will check your credit score and verify your income and assets and provide a pre-approval letter that determines the amount you are approved to receive. 

    During escrow, you must keep your documents organized, and be prepared to submit updated versions of pay stubs, rent receipts or bank statements because lenders need to be assured that your financial situation has not changed.

    A loan commitment letter is full approval. 
    There are three stages to securing a mortgage: first a buyer is pre-qualified (optional), which means the lender has considered the buyers assets, income and debts for a ballpark figure; then the buyer is pre-approved, which means the lender has verified all the numbers and crunched them into a mortgage loan agreement; finally, a loan commitment letter from the lender constitutes full approval of the loan amount. 

    When you attach a loan contingency to your purchase contract, you are obligated by law to "act diligently and in good faith to obtain the designated loan."

    Removing your loan contingency: 
    The loan contingency can be removed by the buyer when the loan is approved by their lender. Buyers routinely request an extension if they haven’t received their loan commitment letter by then. Homebuyers must submit a written request for an extension but it's up to the seller whether or not they will grant it.