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What is meant by the term “contingent” commitment and how does it affect my home purchase?

After a mortgage lender has completed all the necessary up-front processing of an application for financing a home (appraisal, title search, verification of income and financial resources, etc.) they will issue what is referred to as a “commitment letter”. This is, in essence, their offer to finance the property under the terms listed on the commitment. This will usually reflect the financing option that was listed in the sales agreement: conventional fixed rate at a particular interest rate for a particular term. The lender will request that the borrower sign the commitment letter and return it within a specified time frame.

In so doing, a contract for financing has been created as an offer and acceptance, in the form of the borrower’s signature and the returning of the signed commitment letter, now form that agreement. In most cases there are contingencies, or conditions, under which the lender is offering financing. It is very important that the borrower understand that unmet contingencies mean that the loan won’t close until those contingencies have been satisfied. It’s very similar to the contingencies in the Realtor purchase and sales agreement where the buyer makes their offer based on the contingency of getting a home inspection performed and applying for financing within a particular time frame.

The completion of the sales contract is contingent on those things taking place as agreed to between the buyer and the seller. In the same way, the satisfaction of any contingencies on the lender’s commitment letter is required before the lender will arrange for the closing. In addition to the lender, or lender’s representative, your Realtor is an excellent resource to help you to understand how to satisfy outstanding contingencies. They are typically minor in nature, or should be. Things like an up-to-date pay stub, explanation of a gap in employment, copy of tax return or bank statements are typical. It usually means that the lender is 99.9% certain of what these items are, but needs the document trail for their file for audit purposes. Some contingencies can be “show-stoppers” and everyone involved needs to understand that and address them as soon as possible. That may be, but isn’t limited to a satisfactory appraisal, verification of funds needed to close or even a clean title search. Again, your Realtor is a great resource in finalizing everything needed to close on that dream home!

Barbara Cunningham

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