Even when pre-approved for a loan, mortgages are not set in stone until you get your final approval, which is often called a commitment letter. Between the time you sign a purchase agreement and close on a new home, there are many steps to complete before you can move in and call it yours.
Contingencies are clauses in the purchase agreement stating the sale of the home will not be finalized until certain conditions are met. There are various contingencies that can be included in a contract, and must be signed off on by both the buyer and the seller.
A mortgage contingency, or loan contingency, is a clause that protects both the buyer and the seller in the case of a mortgage loan falling through. The mortgage contingency generally gives a specified amount of time for the buyer to secure financing.
If a loan is not secured within the specified time frame, a buyer can back out of the purchase of the home without legal repercussions. The buyer will even receive their earnest money back. In addition, the seller isn’t stuck in a contract with a buyer who is unable to secure financing. They can put their home back on the market and move forward with a qualified buyer.
Mortgage contingency clauses usually also include lending terms. Lending terms state a specific dollar amount and interest rate the buyer needs to be approved for to purchase the home, in addition to loan closing fees. If the interest rates are too high, the buyer can back out of the sale agreement.
While sellers generally look for buyers who are pre-approved, the final commitment letter doesn’t come until a few days to a week before closing. Why? The mortgage company needs to verify information about the borrower and the property being sold. The mortgage lender will take into account the home inspection report and the appraisal of the house to make sure the value to the home is appropriate to the size of the loan being given.
Do you have more questions about contingencies or the mortgage process? Contact us!