Loans

What Is a Contingent Loan?

The process of buying your first home and getting your first mortgage can be incredibly intimidating for many people. It can be especially nerve-wracking if you are unfamiliar with many aspects of the process. One of the best ways you can prepare for your first sales contract and home loan is to increase your overall knowledge about real estate contracts and mortgage lending services

What Is a Mortgage Contingency?

A mortgage contingency is a clause in the purchase contract for a home that states the sale can only go forward if certain conditions are met to protect both the buyer and seller. A contingency clause can refer to a variety of conditions, such as an appraisal contingency and an inspection contingency. 

In the case of a mortgage or loan contingency, the condition that must be satisfied to maintain the purchase agreement is to secure financing for the home. The buyer must obtain financing within the loan contingency period, which typically lasts between 30 and 60 days. After the conditions have been met, the closing process on the home can begin.

How Do Mortgage Contingency Clauses Work? 

When a home buyer decides they have honed in on the house they wish to purchase, their real estate agent must submit a purchase offer to the seller. If the buyer has not already been pre-approved by a mortgage lender, then they can add a mortgage contingency clause to their offer. Both parties will then sign the purchase agreement, after which the seller agrees to take the home off the housing market, and the buyer pays an earnest money deposit.

After the agreement has been made, the buyer will have the time frame of the contingency period to secure financing for the home purchase. Once there have been lending services provided, the buyer will submit a mortgage commitment letter from their lender so that the closing process can officially begin. 

However, suppose the home buyers are unable to obtain financing within the contingency period. In that case, both the buyer and seller have a right to cancel the contract, and the buyer will have their earnest money deposit returned.

Details Included In a Mortgage Contingency Clause

When drafting a loan contingency clause, both the buyer and seller must agree on the conditions included in the sales contract. Every financing contingency ought to have these important elements and lending terms:

Contingency Period Deadline

The mortgage contingency clause will need a set deadline by which the buyer must secure financing. This timeframe is called the contingency period. It is typically set somewhere between 30 and 60 days, although in some cases, it can be longer or shorter. Both parties must be in agreement on the financing contingency timeframe. 

Mortgage Type

Most mortgage contingency clauses will state the type of mortgage that needs to be secured for the real estate transaction. Once the buyer has determined which mortgage banking option is the best fit for them, the seller will need to agree to it for the purchase contract to go through. 

Sales Price Amount

The contingency clause will specify the amount of money that will need to be financed for the home buyers to go through with the purchase. Specificity of the necessary amount helps protect buyers who may be approved for a mortgage but not an amount high enough to go through with the sale. This way, the buyer can cancel the contract and not lose their earnest money. 

Origination Fee & Closing Costs 

Before a home sale agreement is finalized, it is crucial that all additional fees and charges are clearly established. The buyer can use the mortgage contingency as an opportunity to determine how much they will be required to pay in closing costs and anticipate what origination fees they might need to factor into their financing costs. 

Waiving a Loan Contingency

The mortgage contingency clause is included in most real estate transactions. However, there are some situations where a buyer is permitted to wave the clause if they so choose. The waiving of a loan contingency might be done in instances where the buyer is purchasing a home outright without any financing. 

In some circumstances, buyers who have been pre-approved for a mortgage might choose to waive the clause. But this is not recommended unless you do so with great certainty and extreme caution, as not having a contingency clause poses significant risks.

Tips For Preparing For a Mortgage

Getting a mortgage is likely one of the most significant financial decisions you will make. Real estate transactions deal in vast amounts of money that most ordinary people don’t throw around regularly. Securing financing for a home will usually mean entering into a financial contract of 20 to 30 years which is a big chunk of your life. It’s for this reason that buying a home and taking on a mortgage should be done with great consideration and care. 

Review Your Credit Report

To be approved for a mortgage and get the best interest rate possible, you will need to have an excellent credit history. Before deciding if you are ready for your first mortgage, request a copy of your free annual credit report from one of the major credit bureaus. Take a look at your overall score and double-check that you don’t have any negative marks that could hurt your chances of being approved for financing. 

Your credit report might need some work before you can be approved for a mortgage. While you save for your down payment, pay off the credit cards or monthly installment loans that are harming your credit report. Spending some time and effort on improving your credit score can make it significantly easier to get an affordable interest rate. 

If everything is looking good, that doesn’t mean you can forget about it and move on. You will need to maintain your credit throughout the home buying and funding process. Making any unwise moves could put a wrench in your plans as contracts can be canceled if big issues crop up before the closing of the sale. 

Save a Large Down Payment

While there are a lot of mortgage options that don’t require a huge down payment, the larger the down payment, the better. Saving a significant amount of cash to lay down upfront will allow you to get shorter terms and better interest rates. 

Doing this will save you money and help you speed up the process of building equity in your home. Having a substantial down payment saved is one of the best things you can do when securing a mortgage loan.

Be Realistic With Your Budget

Just because you can finance a higher home buying budget does not necessarily mean that you should. It is vital to be realistic about what you can afford for your first time. 

You might be able to get lower monthly payments by getting the longest terms available, but the longer the terms, the more time it will take for you to fully own your house. Be realistic about how long you plan to live in this house and whether you can afford to pay it off by the time you move, as you never know what the real estate market will look like.

Don’t Rush It

When purchasing a home for the first time, you will want to take your time with it. Do your research so you can work with the best people and get the perfect deals. You don’t need to make a decision right away. Be thorough with everything and never rush yourself. This house will be a home to you for a very long time; you want to be positive it is the best fit and get the most beneficial financing for your budget and lifestyle. 

References: 
How Does A Mortgage Contingency Work?
What is a Mortgage Contingency, and How Long Does it Last? – ValuePenguin