Virtually every residential real estate contract contains a “mortgage contingency” paragraph unless the buyer has all of the cash to pay for the property. Since it is rare for someone these days to be able to pay cash for a home the “mortgage contingency clause” is a factor in most real estate purchase contracts. 

This clause allows for a buyer to escape the contract (and have the deposit returned) if he is unable to obtain a mortgage loan on the specified terms by the specified date. The buyer is required to notify the seller by that date whether or not he has obtained the required commitment to extend the loan from the lender.


If he fails to so notify the seller that the loan commitment is not to be forthcoming , the contingency is deemed to be satisfied and the buyer is now required to go through with the closing or risk losing his deposit.


This clause should be more accurately described as a “mortgage commitment contingency clause” because the contingency is satisfied when a lender issues a letter or “commitment” to lend the money and not when the loan finally occurs. This can cause many problems for a transaction if the lender agrees to provide a loan but for some reason does not in fact follow through with the actual provision of the loan.


The buyer may not be able to purchase despite the possession of a commitment to loan for a variety of reasons: the property fails to appraise for a high enough value, the buyer loses his job, or for some other adverse change in the buyer’s financial circumstances.


Since the commitment to loan relies on no adverse change in the buyer’s financial circumstances, such an unforeseen change may cause the lender to revoke the promise to loan after the mortgage commitment date.


This problem of the issuance “commitment” but a failure to actually loan has become more common as the competition among the lenders increases. Many lenders issue “pre-approval letters” which are often enough to qualify under the terms of a standard “mortgage contingency clause”. This type of commitment is only based upon an approval of the buyer’s ability to pay a loan and is no way based upon the value of the property to be purchased.


Obviously if a buyer has yet to select the property to buy; a lender cannot approve the property. In reality the “pre-approval” letter still has a contingency in that the lender’s evaluation or appraisal of the value of the property to be purchased must still equal of exceed the agreed purchase price.


The end result of this situation is that buyers and sellers may rely on a lender’s promise to extend a mortgage loan only at their peril.

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