Does Your Real Estate Purchase Contract Have A Mortgage Contingency?
Table of Contents
- The Mortgage Contingency Is An Important Part of the Contract To Sell Your Home
- Don’t Accept a Contract to Sell Your House Without a Pre-Approval Letter
- Mortgage Underwriting Is Where the Real Work Happens
- The Home Appraisal Determines the Value of Your House
- Mortgage Commitment is a HUGE Milestone
- Check Out Any Conditions in the Mortgage Commitment Letter
- You Are Almost Finished When You Get the Clear to Close
- Final Thoughts On the Mortgage Contingency
In this video, I walk you through the process of selling your house to a buyer who put a mortgage contingency into the contract.
This is an important contingency in the contract and you need to be educated about how it works when selling your house on your own.
You can either watch the video below or read the full transcript that is just below the video!
In this video, I’m going to get into everything you ever wanted to know about the mortgage contingency.
But first, congratulations are in order, you have found a buyer for your home, entered into a contract with them and are now in the escrow process.
Getting under contract is very exciting and you are well on your way to saving thousands of dollars after purchasing one of my flat fee MLS professional listing plans.
Depending on the terms of your contract, you may have a couple of contingencies that need to be removed before you can get your house actually sold.
The Mortgage Contingency Is An Important Part of the Contract To Sell Your Home
And perhaps one of the most complicated and important contingencies of all is the mortgage contingency.
In essence, the mortgage contingency is in place, and states that the buyer will secure whats called mortgage commitment, by the date specified in the contract.
And if they do not get this mortgage commitment, the contract can be cancelled and deposit returned to the buyer.
Which means you have to put your house back on the market!
This is a huge way out of the contract for the buyer.
Which means, it can be particularly problematic for a FSBO seller because it can take many weeks to find out if the buyers will actually get this mortgage commitment.
Or just end up getting denied and be unable to purchase your home.
And if you have to put your home back on the market after all of that, then you are right back to square one.
Except a few weeks to months further down the road.
This is not a good situation to be in when you are selling your house without a real estate agent!
Don’t Accept a Contract to Sell Your House Without a Pre-Approval Letter
So hopefully, before you accepted the buyers offer and entered into a legally binding contract, they provided a pre-approval letter from the bank.
Which says that they met some basic qualifications for obtaining a mortgage.
In case you were wondering, the buyers can only provide a pre-approval letter when submitting an offer to buy your home.
I’ve never seen or heard of a buyer being fully approved for a mortgage at the time they submit an offer.
Mortgage Underwriting Is Where the Real Work Happens
This is because the bank will want them to go though the full mortgage underwriting process.
So what is the mortgage underwriting process?
This is where an actual live person (not a computer) carefully and diligently reviews the complete mortgage application the buyers submitted.
They will determine what the probability is of the borrowers defaulting on the mortgage loan.
Which is also called determining the risk level.
The underwriters job is to determine if this risk level is acceptable for the lenders standards AND to make sure the property meets the lenders full qualifications.
It is important to note, that every lender has different criteria they use to determine what an acceptable level of risk is and what property qualifications they will accept.
Now, there are a lot of steps in the mortgage underwriting processes.
The Home Appraisal Determines the Value of Your House
One of the most important steps that typically happens during underwriting is the appraisal of the property.
This is where a licensed real estate appraiser will come to your home and determine what it is worth in today’s market.
It is very critical to understand that if your home does not appraise at or above the purchase price in the contract then the lender can deny the mortgage loan to the buyer.
This all depends on the type of financing and down payment amount the buyers are doing for the loan.
If this low appraisal scenario does happen and the bank will not finance the loan, you have 3 options.
1) You have the right to cancel the contract and put your home back up for sale
2) You can renegotiate the purchase price or other terms of the contract with the buyer
3) You can dispute the appraisal and try to get it adjusted
Hopefully this will not happen to you but it does happen fairly regularly.
Once the loan has fully gone through underwriting and looks good, this is where that mortgage commitment letter is issued to the buyers.
Mortgage Commitment is a HUGE Milestone
Ok, so you must be asking what exactly is mortgage commitment?
Mortgage commitment is when the bank basically says ok our underwriters completely reviewed the application the buyers submitted, as well as the property, and they approve them for getting a mortgage to buy your home.
And they communicate this with a formal written letter of commitment to the buyers.
When this commitment letter is sent to the buyers, they should then send it to you for verification.
Then the mortgage contingency in your contract should be satisfied, and thats good news, great news actually!
But you are not out of the woods yet, usually this letter will include some terms and conditions that STILL need to be satisfied before they are 100% approved.
But this is a huge milestone.
The buyers at this point should be able to get the loan to buy your home.
Which means you are getting very close to successfully selling your house by owner.
And typically, they will only get denied after this letter is issued if something is completely out of whack.
Check Out Any Conditions in the Mortgage Commitment Letter
So what are some example conditions that could be in the mortgage commitment letter?
Here are some of the most common mortgage commitment conditions
- Verification the buyers have required funds to close.
- Verification of employment, closer to the closing date.
- Verification that the buyers debt to income ratio has not significantly increased.
- Verification of a home owners insurance policy in place.
- Verification of satisfactory title commitment.
The above list are some of the most typical examples.
However, it is important to note that the lender could put any conditions that they feel like into the letter.
And these will need to be satisfied in order to get the “Clear to Close”.
But before I talk about the clear to close.
I want to give you some friendly advice.
If mortgage commitment has not happened by the date in the contract then the buyers and the seller can work together to hopefully extend the date.
But you only want to extend this date if the buyers have been working diligently on securing a mortgage and both parties are in agreement that an extension is what they both want.
After all, if it looks like the buyers will eventually just be denied for a mortgage, it might make sense to just go your separate ways and not delay the inevitable.
You Are Almost Finished When You Get the Clear to Close
But back to clear to close.
Remember talking about the conditions in the mortgage commitment letter?
Well, when those conditions are met and the lender is satisfied then they will typically issue what is referred to as “clear to close” and at this point the closing has the green light to happen from a mortgage perspective.
There is no definite day or timeline as to when clear to close happens but ideally you want it to happen with plenty of lead time to get everything scheduled correctly.
This is really out of your control as a seller.
But you should stay on top of the buyers and their real estate agents to make sure everyone is working hard to get the clear to close.
Final Thoughts On the Mortgage Contingency
The biggest take away is that if you accept a buyer who is relying on mortgage to purchase your home then you always run the risk of the deal falling apart due to mortgage getting denied.
Which means you are not safe until you get to the closing table and the deal is done.
Hopefully, this did a good job walking you through the mortgage contingency when selling your home.
This is a complicated topic and I wanted to make sure that you are as educated as possible when selling your home on your own, DIY style.
But if not and you still have questions, drop us a comment below to discuss how we can help you out.
About the Author: Kris Lippi is the owner of ISoldMyHouse.com and the broker of Get LISTED Realty. He actively writes about real estate related topics such as buying and selling homes, how-to guides for around the house and home product recommendations. He has been featured in Inman, Readers Digest, American Express, Fit Small Business, Policy Genius, Lending Tree, GoDaddy, Manta as well as other major websites. Read more about us here.