My colleague, Morgan Brown wrote a great post on how to keep your loan from disappearing. The follow up to his great advice is to also ensure you have a mortgage contingency in your real estate purchase contract just in case your loan actually does disappear and you find yourself without financing.

While real estate contracts may look simple being only a page or two in length you must recognize that these contracts are legally binding. Once you agree to buy a home, (by virtue of executing the contract,) you cannot just decide to walk away because you had a change of heart. This is why most sellers require significant earnest money deposits to know that the offer is being made in good faith. The seller wants to ensure you have a financial incentive not to back out of the transaction at the last minute.

So, what happens if the deal falls apart because you can’t get a loan? You will be thankful for a mortgage contingency. The mortgage contingency is a date negotiated into the contract that protects the buyer’s earnest money in the event they are unable to secure unconditional financing by the agreed upon date. The date is negotiable, but it is finite and generally not for more than 30 days after the seller accepts the contract.

Once the mortgage contingency date passes, the seller can legally keep the earnest money. Buyers should work diligently with their lender to secure unconditional financing by the contingency date stated in the contract.

Mortgage contingencies are often left out of contracts, particularly in a seller’s market, because seller’s have the upper hand. However, now that it is a buyer’s market, sellers have to accept contingent contracts in order to sell their home in a timely manner. Moreover though, the contingency is an additional layer of protection in the unpredictable mortgage market.