What is a Loan Contingency?

A loan contingency, also called a mortgage contingency, is a specific clause within a real estate transaction that allows both the homebuyer and seller the right to terminate the agreement if specific conditions are not met. Loan contingencies often live within the contract when purchasing a home and provide both parties the ability to back out of the home sale agreement without penalty.

Both buyers and sellers benefit from adding a mortgage contingency into the contract. The new homebuyer most frequently benefits when they are unable to provide the funds needed for the mortgage. If for some reason their final funds do not cover the cost of the mortgage, the contingency clause allows them to back out of the purchasing contract and reignite their search for homes within their new price range. A seller benefits by giving the buyer and their team a dedicated timeline to secure funds and close the sale. If there are significant stalls, the seller may choose to void the contract and return their home to the market.

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