What is a Mortgage Contingency and How Does It Work?

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The mortgage contingency process in Connecticut, particularly in Fairfield County, works very differently than in other parts of the country.   This topic is among the most frequently misunderstood by clients and lenders, particularly out-of-state lenders. I hope this post sheds some light on how  this process works in Connecticut.

A contingency, including a financing contingency, is an event, which would allow a party to a contract to terminate the contract without penalty. For instance, a financing contingency allows a buyer or seller, as discussed below, to walk away from an agreement, without penalty, if a loan commitment is not obtained by a buyer.

In most areas of the country, the buyer is required to produce a loan commitment letter (a letter from a lender saying they will make the loan to the buyer) to the seller, and the seller can then decide whether to proceed with the transaction. Usually, the buyer remains protected if the mortgage is ultimately denied. 

The process in Connecticut, however, is very different. Here, the buyer has no obligation to deliver anything to the seller. In Connecticut,the buyer has an obligation to apply for a loan, pursue the loan diligently, and, if the buyer is denied financing by a certain date (usually well in advance of the closing date), the buyer has the right to terminate the contract and receive the return of the contract deposit. If a commitment has not been obtained (or the commitment contains certain conditions) by the specified date, the buyer can ask for an extension of the contingency date and the seller then has the right to either grant the extension or terminate the transaction and return the deposit to the buyer.

Once a buyer obtains a commitment from their lender (with only conditions which are in buyer’s control to satisfy), the contingency is, effectively, deleted from the contract and a buyer is obligated to go forward and complete the purchase. This remains true even if an event happens which would cause the bank to rescind its financing (i.e. loss of job, death, the financial system fails). Once the mortgage contingency is met, the risk is on the buyer and if the buyer is unable to close, the contract deposit would be at risk. 

Understanding how the mortgage contingency works is important in a strong seller’s market, as often buyers are asked to waive any financing contingency. If there is no financing contingency in the offer or contract, all the risk, not just outlying events post loan commitment, is borne by the buyer from the outset of the transaction, as there is no termination provision if financing is unable to be obtained. For this reason, before making an offer without a mortgage contingency, you should make sure you understand fully the commitment you are undertaking and discuss the situation with an attorney.

Should you have any questions about this topic or any others or wish to discuss your personal situation, please do not hesitate to contact me. Also, please share this if you think it may be of interest to someone else!



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