The Ins and Outs of Mortgage Contingencies

Unless they have hundreds of thousands of dollars lying around, most potential homebuyers will be acquiring a mortgage to purchase a home. In order to obtain a mortgage, a prospective lender will comb through the buyer’s finances and decide whether or not they are financially capable of affording the home. This process can be both stressful and time sensitive for all parties involved, which is why most real estate professionals recommend an early pre-approval to alleviate some of the tension and confusion of the homebuying process.

Because most buyers require financing, a majority will add a mortgage contingency to an offer on a subsequent home purchase. A mortgage contingency is a clause in an Agreement of Sale that protects the buyer (and seller) from following through with an agreement the buyer cannot afford. In most situations, a mortgage contingency allows a buyer to walk away from a transaction without suffering any legal repercussions or financial liabilities.

In Pennsylvania, there are several ways a mortgage contingency can affect the success of a transaction.

With the help of a lender prior to writing an offer, a buyer will submit a range of potential interest rates on the Agreement of Sale during the pre-qualification stage. After the application process, if the expected interest rate exceeds the maximum amount designated within the 30-60 days between offer acceptance and execution due to extreme fluctuations, the buyer can terminate the contract. This protects a buyer in cases of economic instability outside of their control, which is not as common unless the country’s economy experiences high volatility like we’ve seen in recent months.

Outside of economic volatility, mortgage contingencies have more likely conditions, which is why it’s one of the most important parts of a real estate transaction. When submitting an offer, the buyer will agree on a mortgage commitment date, a date prior to settlement in which they expect to obtain a mortgage approval. Typically, this falls within two weeks prior to settlement on a 30 day closing or a little earlier for a 45-60 day closing.

The buyer must continue to demonstrate good faith in receiving mortgage approval, even if they may not be approved. If a buyer’s mortgage application is denied by a lender, and the buyer either provided inaccurate information or did not do their due diligence, the seller may terminate a contract, and the buyer may lose their deposit.

However, if the buyer does everything within their control to pursue a loan and is denied, they are entitled to a return of their deposit. Any costs the buyer incurs as part of the mortgage approval process (appraisal, title insurance etc.) will be taken as a loss.

How does a mortgage contingency affect the seller?

As stated above, the seller has some control to terminate a deal if the buyer does not hold up their end of the commitment. A seller can terminate a contract if the buyer does not present a mortgage approval by the stated date, the approval does not satisfy the loans terms as stated in the contract, or if the buyer’s mortgage approval has additional conditions not specified in the Agreement of Sale that are not removed with 7 days after the commitment date (conditional home sale, inaccurate approval date, etc.).

A mortgage contingency also affects a seller when the seller receives multiple offers and must evaluate the strength of each offer. The contingency is another way out for a buyer, which means if the buyer doesn’t gain mortgage approval, a seller may be forced to put the house back onto the market, which can be costly, especially if the seller is under contract for a new home of their own.

Another option for a seller, though not as common, can be to offer financial support for a buyer so the mortgage can be approved. Similar to a seller’s concession in another section of the Agreement of Sale, sellers have the ability to pay for loan origination fees or points to help a buyer get their rate within the range stated in the contract. This can be a loss for the seller but means the deal can proceed without the issue of the contingency. If the seller were already planning to contribute to a buyer’s closing costs or agent compensation, this could move support from one place to another to secure the deal.

The final hurdle of the mortgage contingency involves needed repairs before a lender or insurance company can approve the mortgage. These issues would be found during the appraisal and not necessarily the home inspection. Though substantial issues would likely appear in both, the home inspection is a separate contingency with its own conditions. If a property requires immediate repairs in order for the buyer to obtain mortgage approval, a buyer must notify the seller of the repairs, and a negotiation period will follow. Both the buyer and seller will have their own exits if either party does not respond or cooperate with the necessary demands.

What if a buyer chooses to waive a mortgage contingency?

Many believe this makes the offer a cash offer, yet this is misleading. A buyer may waive a mortgage contingency regardless if they are using cash or require a mortgage. Waiving the contingency only means the deal is not dependent on acquiring the mortgage. A buyer who waives the mortgage contingency and who still plans on using a mortgage for funds likely has solid financial footing and confidence they’ll be approved. Waiving a mortgage contingency strengthens an offer, removing a potential buyer exit. If a buyer waives the mortgage contingency and does not qualify for a mortgage, the next steps become complicated because they could owe the seller a substantial amount of money or find another way out.

In most transactions, a seller will request a Buyer Financial Information sheet, which will highlight a buyer’s assets and liabilities to determine buying power. Sellers view this statement if the buyer is presenting an all-cash offer but will also analyze this document if the buyer is obtaining a mortgage for the reason stated above. A seller must do their due diligence as well and be certain a buyer can perform their end of the deal before acceptance.

Although mortgage contingencies have strict conditions, a majority of real estate transactions are dependent on a loan approval process. An experienced, trusted real estate team, which includes agent, lender, title company, and insurance provider can help potential homebuyers get through the variables and into their new home with ease.

5 Answers For Potential Homebuyers Entering the Spring Market

Potential homebuyers are flooded with misinformation: there’s no inventory, interest rates are too high, or saving for a down payment has become too hard. The list of reasons not to buy continues, but the truth is the real estate market is alive and kicking, and it’s about to pick up. The spring market is one of the most active periods of the year. It’s a time of stability between the holidays (extended this year with a Super Bowl parade) and the end of the school year where summer camps and family vacations alter routines. With February breezing by, and Punxsutawney Phil’s prediction of 6 more weeks of winter halfway over, potential homebuyers should be preparing for the next steps before we’re celebrating the 4th of July with fireworks and the Club World Cup at Lincoln Financial Field, wondering where the last six months have gone.

Here are five answers potential homebuyers should know before entering the spring market.

Know Your Why

Whether it’s to find stability, build equity, get away from annoying neighbors, or because life changes happen, a quest for a home starts with a clear objective for exploring what often times can be referred to as the most stressful life decision. Too often this foundational question gets confused with Is it the right time to buy? It’s always the right time to buy. The market doesn’t wait for anyone, but it’s also not a race to the closing table. It should be the right time to buy for the individual(s), and the reason should drive everything else.

Know Your Financial Limits

It’s fun to search online for the dream house with modern updates, an acre yard, two-car garage (Porsche included), fully finished basement, and swimming pool with a patio kitchen. It’s human nature to want something attractive that stretches our boundaries. I want midfield seats every 2026 FIFA World Cup game in Philadelphia. Maybe dabble in a few other cities, too. Why not? These same desires can lead us astray when buying a home, so a potential homebuyer’s next step relates to affordability. An experienced real estate agent can help foster a relationship with a lender, who becomes an integral part of the home-buying team. If securing a mortgage, a future owner needs to project future monthly payments, which includes taxes, insurance, maybe PMI or HOA dues. A mortgage is influenced by debt-ratio and debt-to-income ratio, two key numbers that affect buying power and staying power, along with credit history and employment stability. Once a lender analyzes those numbers and an affordability range becomes more specific, a potential homebuyer will factor in utilities and other monthly payments (car, credit cards, loans, etc.). Only then is it time to explore houses.

Know Your Search Area

Expert knowledge of the search market is one of the biggest skillsets a real estate agent can provide a potential homebuyer. While many of us may drive the same routes to school, the food store, hardware store, our favorite restaurants, or soccer practice, we are so consumed with life and our 90s hip-hop playlists to notice the transactions happening all around us. Real estate is hyper-specific. The value of the same property in two different neighborhoods can vary for a number of reasons. Curb appeal, homeowner maintenance, location, and local economy trends are only some of the factors that influence value. Just because one property sold for X amount last spring doesn’t mean it will hold the same value this spring. It could be higher or lower. A property may sell in five days while a similar property in another area sits for months. Value is not an exact science, but knowledge of the search area and comparable details (bedrooms, bathrooms, basement, garage, yard, pool etc.) puts any potential homebuyer in a better position to find the right home before it’s gone.

 Know Your Competition

Although a positive mindset helps turn those dreams into reality, potential homebuyers aren’t alone. Many other qualified buyers are looking for a similar home with many of the same features in the same area, and they may be presenting more attractive offers. Each situation is different, but before visualizing the tap-in closing and house-warming party, future owners must prepare for competition and decide with an agent how they will stand out. Sometimes, the best offer isn’t always the most lucrative. Sellers have their own WHY. Do they need an early closing? A later closing? Are they financially stressed? Do they want the most secure financing? Do they want to sell “as is?” Do they have their own emotional attachments? Are they already living somewhere else? These are only some of the many questions that could alter the direction of what would make the best offer to match the sellers’ WHY.

 Know the Process

In a perfect world, the potential homebuyer finds the dream home on day 1, submits a great offer (under ask) that gets accepted, and moves right in 30 days later with no hang-ups or required maintenance. Search To Turn Key, or STTK. It doesn’t always happen that way, but if it does, they are organizing the next outing to the sports book. In most scenarios, the home-buying process takes time. And why rush? As stated earlier, there’s no race to the finish, but there may be situations that affect the smoothness of the ride. The right house may not be available. Offers have counter-offers or rejections. Buyers have contingencies. Inspections uncover major flaws. Financial lightning bolts disrupt mortgage approval. Homes may appraise for less than the agreed contract price. Settlement dates change. These are only some of the situations that affect the process. Despite challenges, an experienced agent can help stabilize the home search until it’s time to for the homebuyer to walk up the front steps and into their new home.  

Buyers Post-NAR Settlement

If you haven’t been following the real estate market lately, you may have missed the latest news to affect the homebuying process. Earlier this year, the National Association of Realtors settled a class action lawsuit over alleged antitrust violations, which resulted in slight changes to how real estate transactions occur moving forward. Though the NAR affirms that agent commissions have always been negotiable, the center of the issue is the communication and transparency of consumer information. As a result, the consumer is now more informed when entering a transaction, and though current homebuyers may have been affected the most, the long-term benefit of the settlement lies within the homebuyer’s control in the process.

So what’s changed?

Agreements between a buyer and broker via an agent are now required before an agent is permitted to show a home.

Though buyer agreements have been strongly recommended for decades, most real estate buyer-agent relationships had been solidified through an Agreement of Sale. Buyer agent compensation is Included in this agreement. Prior to August 17th 2024, buyer agents were typically paid by the seller through what is known as a broker cooperation agreement. Essentially, a seller’s agent was paid a commission by the seller then split that commission with a buyer agent for bringing the buyer to the table. The buyer didn’t need to put up the funds necessary to pay their agent because compensation came from the seller. That has since changed. A buyer is now responsible for compensating their agent as agreed to in the buyer agency contract, and that number has to be specific in the BAC, whether a percentage of the sale price, a flat amount, or any other agreed upon number.

What’s important to note is that agent commissions are negotiable. When buyers are about to work with an agent, they should have conversations upfront about what the agent will do and what their time and efforts are worth. Also, buyers do not need a contract to speak with an agent at an open house or inquire about their services.

During this post-settlement transitional period, buyers may be better informed about their options but may not be financially prepared to incur these extra costs. Fortunately, support may still come from the seller. In an Agreement of Sale, two categories under Seller Concessions define how buyers may request financial support. Sellers may offer a buyer broker fee or closing cost assistance. The buyer broker fee refers to a buyer asking a seller to cover some or all of their agent’s commission. Sellers may still approve a seller’s agent to share a portion of the commission with the buyer agent as had been done in the past. All that transaction requires is an additional form that recognizes the agreement between two cooperating brokers. This section asks a seller directly for support. Closing cost assistance, formerly known as a seller’s assist, provides money back to a buyer at closing to pay for costs not associated with buyer broker fees. So whether it’s support with an agent commission or additional closing costs, a buyer may receive assistance from the seller to secure the deal. Other options for buyers to find additional funds should be discussed with a mortgage lender.

But why would a seller offer assistance to a buyer’s agent? For the simple reason that sellers still need buyers. Even in a seller’s market, more buyers means stronger offers. Sellers who fail to offer some sort of cooperation this soon after the settlement changes could be losing out on an opportunity to reach motivated buyers.

The second change to come out of the settlement for buyers focuses on the role Multiple Listing Services play in the sharing of information. MLSs are the most prominent way brokers share information with other brokers. After August 17th, 2024, seller agents are not permitted to advertise buyer agent compensation through the MLS. Sellers can still offer buyer agent compensation, as stated earlier, but must relay that information through other forms of communication (conversations, company website, flyers, signs, social media, etc.). A buyer’s agent can’t just rely on the information through MLS. They will need to pick up the phone or check another source.

In the end, the recent changes from the NAR settlement should bring more awareness to the buyer about the process of real estate transactions and encourage transparent conversations about a buyer-agent relationship. That in itself, should help buyers navigate one of the most stressful financial decisions of their life.

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