Mortgage contingency — quick definition
A mortgage contingency, also called a financing contingency, is a clause in a real estate purchase contract that lets a buyer walk away and recover their earnest money deposit if they can’t obtain mortgage financing within a set timeframe. It protects buyers from being legally or financially forced to close when a lender denies the loan.
Why it matters
Including a mortgage contingency shields buyers from losing their deposit and from potential litigation if their mortgage application fails. Sellers may prefer offers without this contingency because waiver creates more certainty and a faster close, but in many markets the clause is standard and negotiable.
How a mortgage contingency works
- Set the terms: The contract specifies the time allowed to secure financing (commonly 30–60 days), the maximum acceptable interest rate, loan type (conventional, FHA, VA, etc.), and allowable fees.
- Apply for the loan: The buyer applies, submits documentation, and goes through underwriting with a lender.
- Commitment or denial: If the lender issues a mortgage commitment before the deadline, the contingency is satisfied and the sale proceeds. If the lender denies the loan and the buyer notifies the seller before the deadline, the buyer can cancel and recover their deposit.
- Waiving the contingency: If a buyer waives the mortgage contingency, they remain contractually obligated to close even if financing falls through—risking loss of deposit and possible legal action.
Real-world examples
1. First-time buyer in a competitive market
John includes a 45-day mortgage contingency in his offer. After a job change his lender denies the loan. Because the contingency exists and he notifies the seller in time, John cancels the contract and gets his deposit back.
2. Short closing timeline
Sarah and Alex use a 30-day mortgage contingency. Lender delays approval and the seller refuses to extend the deadline. The buyers must either accept the risk of closing without guaranteed financing or cancel and lose the home.
3. Appraisal gap
Maria includes both a mortgage contingency and an appraisal contingency. The lender’s appraisal comes in below the purchase price and she can’t cover the difference. Because her mortgage contingency is tied to loan amount, she cancels and keeps her deposit.
4. Waiving the contingency
David waives the mortgage contingency to make his offer stronger. His loan is later denied for an undisclosed credit issue. With no contingency he risks forfeiting his deposit and possible legal consequences from the seller.
Key points to consider
- Inclusion is common: Buyers typically add a mortgage contingency to protect their deposit, especially when financing is uncertain.
- Customizable terms: Buyers can negotiate the contingency period, acceptable loan terms, and allowable fees to balance protection with seller appeal.
- Seller preference: Sellers often favor offers without contingencies for speed and certainty, but market conditions influence whether waiving is necessary.
- State and local variation: Laws and customary practices vary by state—local real estate agents and attorneys can explain specific rules.
Practical tips
- Get preapproved (not just prequalified) to make offers stronger while keeping the contingency.
- Set realistic contingency deadlines based on your lender’s typical processing times.
- If you must waive the contingency to win a bid, consider backup protections such as a bridge loan or larger down payment to reduce risk.
- Communicate early with your lender about documentation to avoid avoidable delays before the contingency deadline.
Bottom line
A mortgage contingency is a crucial buyer protection that creates a legal “out” if financing falls through. Properly written and negotiated, it balances buyer protection with seller expectations; waiving it can improve offer competitiveness but increases financial risk if the loan is denied.
