In a residential purchase contract, what is a mortgage contingency?

• A. A clause allowing termination or renegotiation if the buyer cannot secure financing on acceptable terms.
• B. A clause guaranteeing mortgage approval regardless of buyer finances.
• C. A requirement that the seller obtain financing.
• D. A provision for extending closing date due to financing.

Answer: (A)

A mortgage contingency is a provision in a residential purchase contract that makes the deal depend on the buyer obtaining financing on terms they find acceptable. It gives the buyer the option to back out or renegotiate if they cannot secure a loan by a specified deadline, or if the lender denies the loan or offers terms that are unacceptable. This protects the buyer from being bound to buy without financing and creates a clear path to cancel without penalty if financing isn’t obtained.

It’s not a guarantee of loan approval, which would imply the lender will provide financing regardless of the buyer’s finances. It also isn’t a requirement that the seller obtain financing, nor is it solely about extending the closing date; while financing issues can affect timing, the core purpose is to provide a way out if financing falls through.