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40-year mortgages aren’t exactly what you think they are, and we’re here to clear up the confusion. Yes, a 40-year mortgage is only 10 years longer than the traditional 30-year mortgage, but the increased time to amortize interest makes it significantly more expensive. Though it may seem more affordable on a month-to-month basis, the increased amount of interest you’ll pay over the entire loan makes it hard to pay off the principal and build equity.

Additionally, 40-year mortgages are not backed by the federal government, so it can be hard to find a lender that originates them.

Here’s a deep dive on exactly what they are, how to qualify for one, how much they cost, how they compare with other loan terms, and what factors you’ll want to consider if you’re thinking about a 40-year mortgage.

Understanding a 40-Year Mortgage

To understand a 40-year mortgage, it’s important to look at how the mortgage market works and where a 40-year mortgage fits. With a traditional 30-year mortgage, the loan is typically sold on the secondary mortgage market to be bundled into securities by government-sponsored enterprises Fannie Mae and Freddie Mac.

To be eligible for sale, the loan must meet certain criteria to be considered a “qualified” mortgage. One of these criteria is that the loan term must not be longer than 30 years (the average mortgage term length in the U.S. is three decades). So a 40-year loan isn’t considered a qualified mortgage. You might also see it referred to as a “nonconforming loan.”

Because a 40-year mortgage can’t be backed by the government, it’s harder and more expensive to originate. As a result, this type of mortgage often doesn’t make sense for borrowers or lenders.

Recommended: What Is Mortgage Curtailment?

How a 40-Year Mortgage Works

When lenders do offer 40-year mortgages, there are a number of different ways these loans can be structured.

•  ARM: The 40-year mortgages can be adjustable-rate mortgages (ARMs) where the interest rate adjusts every five or ten years.

•  Interest-only for 10 years + 30-year term: They can also operate like a 10-year interest-only loan tacked on to the front of a traditional 30-year mortgage.

•  Fixed 40-year term: They can also work as a 40-year fixed loan, much like a 30-year fixed-rate loan.

Most 40-year loans require that the property be owner occupied. But the biggest hurdle you’ll encounter in the mortgage process is finding a lender that offers 40-year mortgages. Qualification works as it does with a 30-year loan, but because the lender has to keep the loan on its books, it will be extra judicious about lending when it comes to a 40-year mortgage.

40-year Loan Modification

If you’re reading up on 40-year mortgages, you may run across the term as it relates to home loan modifications. Borrowers with FHA loans (from the Federal Housing Administration) who got into financial trouble during the COVID-19 pandemic may have the opportunity to have their loans modified (or “recast”) into 40-year loans.

Advantages and Disadvantages

With a typical 40-year mortgage, it’s clear what the advantage is because there’s only one: a lower monthly payment. A lower monthly payment may make buying a home possible for some borrowers, so it’s tempting to look at a 40-year mortgage despite the drawbacks.

The lone pro, as well as the risks and drawbacks of a 40-year mortgage, can be summarized as follows:

Qualifying for a 40-Year Mortgage

Qualifying for a 40-year mortgage is similar to qualifying for other types of mortgages. In addition to the loan type and interest rate the lender can offer you, other mortgage qualification factors may include:

•  Credit score. There is no minimum score required specifically for 40-year mortgages but generally, the better the score, the better your rate.

•  Income verification. The lender will examine your employment history and how reliable your source of income is.

•  Debt-to-income ratio. How much debt you have affects how large a mortgage you can take on. Higher debt equals less borrowing power.

•  Down payment. The down payment affects the loan-to-value ratio, which affects how much the lender is willing to lend and what rate it will offer.

Recommended: How to Get a Home Loan

Comparing 40-Year Mortgage to Other Loan Terms

When you look at the costs on a 40-year mortgage, it becomes very clear what the tradeoff is. Here is an example using interest rates available in August 2024. Note that the 40-year example has a rate that adjusts every five years, so the total interest paid is an estimate.

For a 40-year loan, you’ll pay $833,870.52 in interest for a $450,000 mortgage. In total, that’s $1,283,870.52 you’ll pay for the $450,000 loan.

The monthly payment on a 40-year mortgage is only about $200 less for a $450,000 mortgage. All told, you would save nearly $300,000 by choosing a mortgage term of 30 years vs. a 40-year mortgage. Borrowers who opt for the lowest payment with an idea that they would pay off the mortgage early would be wise to make sure they understand whether there are prepayment penalties before signing on the loan.

Factors to Consider with a 40-Year Mortgage

Because of how much more you’ll pay for a 40-year mortgage vs. 30-year mortgage, a 40-year loan comes with some serious considerations.

Long Repayment Period

A 40-year mortgage loan will take much longer to pay off. And because you’re paying a greater percentage of interest in the beginning of your loan, it will be hard to pay down the principal for quite some time.

Building Equity Is Difficult

As noted above, a 40-year mortgage loan makes building equity more difficult because of the increased interest costs. Difficulty building equity can make it harder to move because you may not have adequate profits from the home sale to make a down payment on your next home. It can also make refinancing challenging.

Interest Costs Are High

When you look at a mortgage calculator, you may be quite shocked at how much more interest you’ll pay on a 40-year mortgage when compared to a 30-year mortgage, as illustrated previously.

When a 40-Year Mortgage Makes Sense

A 40-year mortgage could make sense if:

•  You plan to refinance to a different mortgage term in the future. If you need to keep monthly costs as low as possible and refinance at a later date, such as when you’re renovating your home, then you may want to consider a 40-year mortgage.

•  It makes a difference in home affordability. If the difference between buying a home and not buying a home is a 40-year mortgage, you’re probably thinking about the 40-year mortgage. Hopefully, you could refinance down the line and save yourself a large chunk of money.

As mentioned previously, the high cost of a 40-year mortgage is a major drawback. The total amount of the mortgage works out to be hundreds of thousands more when compared with a traditional 30-year mortgage. Be sure you’re aware of the increased costs and risks before committing to a 40-year mortgage.

Note: SoFi does not offer a 40-year mortgage. However, SoFi does offer conventional mortgage loan options.

The Takeaway

The 40-year mortgage isn’t common and there are few scenarios where it makes sense. When you compare a 30-year mortgage with a 40-year mortgage, you’ll only pay a couple hundred dollars more per month on a 30-year mortgage, but you’ll save hundreds of thousands of dollars over the life of the loan. If you’re considering a 40-year mortgage, consult a lender you trust. They will have many tools at their disposal for helping you afford a home of your own.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Are 40-year mortgages widely available?

No, 40-year mortgages are not common because they aren’t considered conforming, qualified mortgages. Qualified mortgages follow guidelines set by the government so they’re less risky and able to be bought by Fannie Mae and Freddie Mac. A 40-year mortgage falls outside the maximum allowable 30-year term for a qualified mortgage.

Can I refinance a 40-year mortgage later?

Yes, you can refinance a 40-year mortgage at a later date, provided you can qualify for the new loan you’re applying for.

Is a 40-year mortgage a good option for first-time homebuyers?

There are serious downsides to a 40-year mortgage. It may have a more affordable monthly payment than a 15- or 30-year mortgage, but you’ll have a hard time building equity (which is important for first-time homebuyers) and you’ll pay much more in interest over 40 years than you would 30 years.

Photo Credit: iStock/gradyreese

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q324-022

Half a million dollars may seem like a lot, even for a nice house — but in many American cities these days, it’s close to the norm. For example, in Portland, Oregon in July 2024, the average home value hovered around $540,000. The good news? These days many mortgage programs allow qualified first-time homebuyers to put down as little as 3%, which means your down payment could be a relatively reasonable $15,000 on a $500,000 home.

Below, we’ll dive into the details about how to afford a $500,000 house.

How Much Income Do I Need to Afford a $500K Home?

Before you start to think about saving up a down payment, you may be wondering — do I make enough money to make the mortgage payments in the first place? Spoiler alert: There’s not one easy answer to the question, “How much should I be making to afford a $500,000 house?” But there is some quick math we can do to help figure out your ballpark.

For starters, keep in mind that many financial experts recommend spending no more than 30% of your gross monthly income — the amount you make before taxes are deducted — on housing. That’s about a third.

With that in mind, you can use a mortgage payment calculator to get a sense of what your monthly mortgage payments might look like. If you put $15,000 down on a $500,000 house for a 30-year home loan at a 7% interest rate, you’d pay about $3,200 per month toward your mortgage. That means you’d want to be making about three times that amount, or $9,600 per month, to comfortably afford the mortgage. That’s a yearly income of about $115,000.

Keep in mind that the $3,200 per month figure does not include expenses like mortgage insurance, homeowners insurance, or property taxes. So you would probably need a higher annual income to fully support your home purchase. If you apply the 28/36 rule, which states that your annual housing costs should be no more than 28% of your annual income, you would have about $3,500 to apply to housing. Assuming you don’t have a lot of debt eating away at your paycheck, you would need to earn around $150,000 each year to afford a $485,000 mortgage on a $500,000 home when insurance and taxes are factored in.

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How Much Is the Down Payment for a $500K House?

How much of a down payment you’ll be required to put down on a $500,000 house depends on what kind of mortgage you take out — and your creditworthiness as a borrower. The lowest down payment a first-time homebuyer would likely be able to get away with is 3%, or $15,000, while a full 20% down payment would be $100,000. That’s quite a range!

What Are the Down Payment Options for a Home Worth $500K?

Here’s the breakdown of the various down payment options for a home worth $500,000, depending on the type of mortgage you look into (and qualify for as a first-time homebuyer).

•   Those taking out a conventional home loan and wanting to avoid paying mortgage insurance would need to come up with $100,000 for a 20% down payment.

•   However, these days, qualified borrowers can get a conventional mortgage with a down payment as low as 3%, or $15,000 in this case. Other buyers may need to pony up 5%, or $25,000.

•   Government-backed FHA loans (Federal Housing Administration loans) are specifically designed for first-time homebuyers, and their minimum down payment is 3.5%, which works out to $17,500 for a $500,000 house.

•   Those who qualify for loans backed by the U.S. Department of Veterans Affairs (VA loans) may be able to buy a home without any required down payment at all, though putting down something can help you build equity faster. You can also look into down payment assistance programs.

What Does the Monthly Mortgage Payment Look Like for a $500K Home?

There’s not one set formula for what your specific monthly mortgage payment will look like for a $500,000 home — because each loan is individually written based on your credit score, debt-to-income ratio (DTI), and other pieces of your financial profile. The size of your down payment, the length of the loan’s term, and other factors will also influence the final figure.

That said, if you put down $15,000 toward a $500,000 home on a 30-year fixed-interest home loan at 7.00%, you could expect to make monthly payments of about $3,200. Given that the median household income in the U.S. is just over $75,000, that payment may be tough for many Americans to make. If your income can’t support a $500,000 home, you could consider looking for more affordable places to live in the US.

On the other hand, if you were able to save up the full $100,000 down payment, the $500,000 house would cost closer to $2,700 per month. Or if you could score an interest rate just one percentage point lower, your payments would be $2,900 per month — even if you put down only the same $15,000.

What to Do Before You Apply for a $500K Home Mortgage?

A mortgage on a $500,000 home is a substantial amount of debt to go into. You stand to save a lot of money by ensuring you get the very best loan terms you possibly can.

That’s why it’s a good idea to ensure you’re in the best financial standing possible before you put in your application. That means lowering your overall debt level (focusing especially on high-interest debt like credit card balances), carefully tending your credit score, and ensuring your income is both ample and reliable.

Should I Get Preapproved Before Applying for a Mortgage?

Getting preapproved for a mortgage gives you a leg up in a busy housing market. If you see a home you like and you’ve already got a preapproval letter in hand, you’ll be better able to swoop in before other prospective buyers.

That said, the mortgage preapproval process does usually entail a “hard” credit check (unlike a prequalification), so this step is best left for those who are very serious and ready to move if the right house shows up.

How to Get a $500K Home Mortgage

Applying for a mortgage — even a big one — is easy. Most of it can be done from the comfort of your home, online. You’ll be required to upload documentation proving your income and assets, but once you’ve gathered all the materials, the actual application is unlikely to take more than an hour to complete.

However, given the potential cost of a mortgage on a $500,000 home — whose interest could easily add up to hundreds of thousands of dollars over its three-decade term — it’s worth shopping around to ensure you’re getting the very best deal you can. Even just half a percentage point of interest can make a big difference over such a long span of time.

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The Takeaway

The full 20% down payment for a $500,000 home comes out to $100,000. That said, depending on your creditworthiness, you may be able to get away with putting down a much lower payment — as little as $15,000 if you’re a first-time homebuyer.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

How much should I make to afford a $500,000 house?

You need an income of $115,000 per year to cover the costs of a mortgage and closer to $150,000 to afford a mortgage plus expenses such as mortgage insurance and property taxes on a $500,000 house. The more debt you have, such as a car payment or student loan, the greater your income will need to be. The size of your down payment is also a factor. The greater the down payment, the lower your income would need to be to cover your monthly costs.

What credit score is needed to buy a $500,000 house?

Each mortgage lender has its own algorithm for qualifying borrowers. That said, many mortgage lenders look for a score of at least 620, and if you’re taking out a larger mortgage, the higher your score, the better the terms you’ll likely qualify for.

How much is a $500K mortgage per month?

The answer to this question depends on the loan’s term and the interest rate you qualify for. For those with a lower interest rate, the payment might be about $2,700 per month, while for those with a higher interest rate, the mortgage might top $3,200. Remember this is for principal and interest only. After homeowners insurance, mortgage insurance, and property taxes your expenses will be higher.

Photo Credit: iStock/ Credit:Eleganza

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q324-027

The median price for single-family homes and condos was $360,000 in the second quarter of 2024. So as expensive as it might sound, $300,000 is squarely in the price range of many first-time homebuyers these days.

If you go by the old rule of thumb and save up a 20% down payment, that means forking over $60,000 up front on a $300,000 home sale. However, most contemporary mortgages allow buyers to put down far less — first-time homebuyers can put down as little as 3%, which comes out to $9,000 on a $300,000 home. That said, there will likely be other upfront expenses to contend with, so saving up even more than that is still a good idea.

Let’s take a closer look at how to prepare for a $300,000 home purchase — including not only your down payment but also the amount of income you need to support your purchase.

How Much Income Do I Need to Afford a $300K Home?

There’s not one simple answer to this question — because the real question is, “How much income will it take to afford my mortgage payment?” And that question depends on how much your home loan payment turns out to be, whether you have to pay private mortgage insurance (PMI), and more. However, there is some quick napkin math we can do to help get an estimate.

Many financial experts say you shouldn’t be spending more than about 30% of your gross monthly income on housing. To simplify this even further, let’s just say a third of your gross income.

From here, we can do some reverse engineering and estimating to figure out how much income would likely comfortably support a $300,000 home purchase.

Using a mortgage calculator, supposing you purchase a $300,000 home with a $9,000 down payment and a 7.00% interest rate, you can see that your monthly payments would turn out to be about $1,900 a month. (Note: These figures are only estimates, and your real monthly payment will depend on your creditworthiness, your lender’s unique algorithm, and other factors.)

Using that one-third rule above, you’d need to be earning about $5,700 per month ($1,900 times three) before taxes to make your mortgage payments without overextending yourself financially. That comes out to an annual income of about $68,400.

Using a mortgage calculator with taxes and insurance, will get you even closer to your true monthly number. When you factor in taxes and homeowners insurance, your monthly payment would be closer to $2,300. Returning to the one-third rule, you would need an annual income of $82,800.

Of course, if you have large amounts of existing debt, you may need a higher income to comfortably make your payments. Still, this is a good point of reference to start with.

Recommended:The Cost of Living by State

How Much Is the Down Payment for a $300K House?

As mentioned above, the 20% down payment you’d need to avoid paying PMI is $60,000 for a $300,000 house. But with conventional mortgages that allow qualified first-time homebuyers to put down as little as 3%, your down payment could be just $9,000. (Depending on your credit score and other financial information, you may need to put down 5%, which would come out to $15,000.)

Keep in mind, though, that the down payment isn’t the only upfront expense of homeownership. It doesn’t include closing costs, which could be as much as 3% to 6% of the home purchase price (which means another $9,000 to $18,000, for a $300,000 home). You’ll also need to factor in expenses related to moving, furnishing, repairing, and renovating your new home.

What Are the Down Payment Options for a Home Worth $300K?

Which down payment you’ll qualify for depends on the type of mortgage you take out and your credit history.

•   No matter what type of mortgage you choose, if you put down 20%, or $60,000, you’ll avoid paying mortgage insurance (PMI) as part of your monthly payment.

•   If you qualify for a conventional mortgage, you may be eligible to put down as little as 3%, or $9,000. (Other borrowers may be qualified for 5%, or $15,000.)

•   Those who qualify for an FHA home loan as a first-time homebuyer may put down as little as 3.5%, or $10,500.

•   If you’re an active service member, veteran or surviving spouse, you may qualify for a VA loan. In some cases, you may be able to get a VA loan without any down payment at all.

If even a modest down payment feels out of reach, down payment assistance programs can also help.

What Does the Monthly Mortgage Payment Look Like for a $300K Home?

Again, your monthly mortgage payment will vary depending on your down payment, interest rate, the term of the loan (usually 15 or 30 years), and more. In calculating your specific loan options, your lender will take into consideration your personal credit factors as well as your DTI (debt to income) ratio.

Using a mortgage payment calculator can help. A calculator would show that someone who puts down $9,000 on a $300,000 home for a 30-year fixed-interest mortgage at 7.00% would pay approximately $1,936 per month (not including property taxes, MIP, or homeowners insurance). Note that because of the way loans are amortized, the bulk of your monthly payments will go toward interest, rather than principal, during the first part of the loan’s lifetime.

What to Do Before You Apply for a $300K Mortgage

If you want to maximize your chances for approval when applying for a $300,000 mortgage, consider taking some time to get your financial affairs in order. (Sometimes, life circumstances like a new job or a new baby mean you have to buy a home quickly, so you may not have time to make everything as shiny as you’d like.)

What does this mean? Paying down large existing debts, especially high-interest debt like credit card balances, can lower your DTI and win you more favorable mortgage terms (not to mention making it easier to make ends meet as far as other monthly expenses). Finding ways to increase your income can also improve your application — and make your financial life easier.

Should I Get Preapproved Before Applying for a Mortgage?

Getting preapproved is a great way to understand how much mortgage is available to you based on your current financial standing — and to signal to real estate professionals and sellers that you’re serious. Preapproval differs from prequalification in that it usually does require a “hard” credit check, so you should only do it if you’re truly ready to buy a house when the right one comes along — but if you are, it’ll give you the chance to get your foot in the door quickly.

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How to Get a $300K Mortgage

These days, applying for a mortgage is pretty easy and can usually be done in the comfort of your own home. You’ll likely need to upload documentation proving your income and identity to your lender’s online portal — or if you’re more comfortable doing so, you may be able to apply in person and supply documents on paper or via fax.

The Takeaway

The answer to the question “how much is the down payment for a $300K house?” could be as little as $9,000 or as much as $60,000 — or more. In some cases a zero down payment loan is even possible. It all depends on what kind of mortgage you want and qualify for, as well as how much you can reasonably afford to fork over at the closing table.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Can I afford a $300K house on a $70K salary?

If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.

How much do you need to make to afford a $300K house?

There’s not one set answer to this question, because plenty of factors other than income influence your ability to qualify for a mortgage and comfortably make the payments. A good rule of thumb is to ensure you’re paying no more than a third of your gross monthly income toward housing. You would need an annual income of $82,800 to comfortably afford a $300,000 house when you factor in the mortgage payment, homeowners insurance costs, and taxes.

What credit score is needed to buy a $300,000 house?

Each lender has their own qualification schema as far as credit scores and other creditworthiness markers are concerned. That said, generally speaking, a credit score of at least 620 will help you qualify for more types of mortgages and open your options for shopping around.

Photo credit: iStock/undefined undefined

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

SOHL-Q324-028

If you’re in the market for a new home, you’re likely no stranger to browsing online listing services. During your search, you may come across a listing that’s marked as active contingent. What does active contingent mean and how does it impact the homebuying process? In this guide, we’ll define active contingent and explore common types of contingencies.

What Is Active Contingent Status?

When a real estate listing has an active with contingency status, it means that the seller has accepted a buyer’s offer, but there are certain conditions (known as contingencies) that have not been addressed yet. These contingencies must be resolved before the sale of the property can be finalized.

Other buyers interested in the property may choose to submit a back-up offer in case the contingencies aren’t met and the deal falls through.

How It Differs from Other Listing Statuses

Every industry has its jargon, including real estate. Active contingent is just one of several statuses buyers might encounter while house hunting.

An active listing, for instance, is currently on the market for sale. Offers on the property may have been submitted, but none have been accepted yet, so buyers have the green light to make an offer.

Under contract is often used interchangeably with active contingent. Both mean that the seller has accepted a buyer’s offer, but the sale still depends on certain circumstances being resolved.

A listing with a pending status is farther along in the transaction process. The key difference between pending and contingent status is that the buyer contingencies have been satisfied when a listing is marked as pending. Alternatively, it could mean a buyer made an offer with no contingencies and the deal is moving toward closing, barring any unexpected issues with an inspection or securing a home loan.

Buyers can make an offer on a property, even if the status is pending, though it’s up to the sellers if they want to continue showing the home.

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Common Types of Active Contingent Scenarios

What does active contingent mean in different scenarios? There are several types of contingencies that can be included when making an offer on a home. Here’s a look at the most common contingencies in real estate transactions.

Home Sale Contingency

A home sale contingency makes an offer on a property conditional on the buyer’s sale of their current home.

There are two types of home sale contingencies that affect active contingent meaning: a sale and settlement contingency and a settlement contingency. With a sale and settlement contingency, the buyer has not yet accepted an offer on their current home. Meanwhile, a settlement contingency involves a buyer with a house under contract, but not yet sold.

According to a National Association of Realtors® study, around 53% of repeat buyers in 2023 used proceeds from their home sale to make a down payment on their new home, meaning buying and selling a house at the same time — and settlement contingencies — are probably quite common.

Financing Contingency

A financing contingency, also known as a mortgage contingency, is just as it sounds: a clause that allows buyers to walk away from a home purchase if they’re unable to secure financing. There’s typically a time frame included with a financing contingency — often 30 to 60 days — that the buyer and seller agree to in the purchase contract.

Either the seller or buyer can exit the agreement during the financing contingency period without penalty, meaning that the buyer can get their deposit back and the seller can accept other offers.

Financing a home purchase isn’t just for first-time homebuyers — around 80% of home buyers used financing in 2023. Getting mortgage preapproval before making an offer on a home can help reduce the risk of not qualifying for financing later on.

Appraisal Contingency

What is active contingent if an appraisal is involved? If a contract has an appraisal contingency in place, the buyer can back out of the deal and get their deposit back if the property doesn’t appraise for the amount they agreed to purchase it for.

Home appraisals are typically required when taking out a mortgage or refinancing to determine the fair market value of a property. If the appraisal comes in lower than the offer, buyers have options to keep the deal alive instead of walking away. Namely, they can renegotiate with the seller or make up the difference in the appraisal gap with a larger down payment.

Inspection Contingency

An inspection contingency gives buyers the option to exit a deal if major defects or structural issues are identified during a home inspection. If making an offer with an inspection contingency, the buyer has a set timeframe (usually 7 days) to hire an inspector. The home inspection cost is paid by the buyer and it may be required by the mortgage lender.

Completing a 4-point inspection provides a review of the property’s major systems, including electrical, HVAC, plumbing, and roofing, and this may be all that a homeowners insurance company requires. But a fuller home inspection might turn up issues a 4-point one would miss so it’s worth getting a full home inspection. Buyers can also hire a specialist to examine any issues identified during an inspection in more detail.

An inspection contingency may include a maximum dollar amount for repairs that allows the buyer to walk away from the contract. If they choose to negotiate instead, there’s typically a timeframe for the seller to make necessary improvements or lower the sales price to match the cost of repairs.

Recommended: 10 Tips for Selling Your Home Fast

Implications for Buyers and Sellers

Contingencies carry implications for both buyers and sellers. For sellers, it’s important to review the terms of any contingencies and assess whether it’s likely they can be resolved for the sale to move forward in a timely fashion.

Suppose an offering includes a home sale contingency. Sellers can practice due diligence by checking if the buyer’s home is currently on the market, and if so, what the listing price is and how long it’s been on the market. This information can help decide if the risk associated with the contingency is worth taking.

Contingencies can provide a safety net for buyers to get their deposit back and exit a deal if their mortgage approval or sale of their current home falls through. While limiting contingencies could potentially make an offer more attractive, it’s similarly important for buyers to exercise due diligence in making sure they’re prepared to move forward with a home purchase. This could mean paying repairs out of pocket or taking out a bridge loan to close on a new home before selling a previous residence.

Impact on Real Estate Markets

Homes with active contingent status are still on the market, meaning buyers can request to view a property and make an offer.

Since contingencies pose risk that a deal will fall through, some sellers include a “kick-out” clause in the agreement to increase their chances of getting a better offer. With a kick-out clause, the buyer can accept a noncontingent second offer while the property is still active contingent. In this scenario, the buyer who made the first offer can either remove their contingencies or back out of the deal.

The Takeaway

What does active contingent mean? Put simply, it means a seller has accepted an offer with contingencies that haven’t been met yet. Active contingency meaning varies from deal to deal and may involve a home inspection, securing financing, or a buyer selling their previous home.

It’s important to have your financial ducks in a row if you’re considering an offer on an active contingent property. That way, you’ll be prepared if the initial deal falls through.

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FAQ

Can I make an offer on an active contingent property?

Yes, you can make an offer on a property with active contingent status. This will serve as a backup offer in case the initial deal falls through.

How long does active contingent status typically last?

A property has an active contingent status until all contingencies are resolved, but the window for doing so typically spans 30 to 60 days.

Is an active contingent listing still considered “on the market”?

Yes, an active contingent listing is still on the market, meaning it can be shown to interested buyers and the seller can accept backup offers.

How does active contingent differ from a pending sale?

A pending sale is moving forward to closing, whereas active contingent status means that certain contingencies, such as financing or a home sale by the buyer, haven’t been met yet.

Photo Credit: iStock/deliormanli

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This article is not intended to be legal advice. Please consult an attorney for advice.

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