The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

Mortgage Contingency Clause in NYC

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Simply put, a mortgage contingency clause in NYC real estate ensures the following. Say a buyer applies for a loan from a bank. If that buyer fails to obtain a firm commitment for a mortgage within the specified period, the buyer may cancel the contract. Then the buyer receives the return of the initial downpayment. We are happy to share mortgage contingency clause samples and examples. Buyers misunderstand the financing contingency. Therefore, this concept is a rather broad term for a contract contingency. It includes many negotiable parts, such as an appraisal contingency or minimum loan amount contingency.

Sellers & buyers often inquire about the meaning of the “mortgage contingency clause” in New York real estate contracts.

real estate contract in New York: Mortgage Contingency Clause The “commitment letter” should not be confused with the “pre-approval letter.” A¬†pre-approval letter is typically a non-binding letter. This letter carries very little legal weight, and a bank issues it before conducting a more detailed investigation of the borrower and the property.

broker showing a coop apartment to potential clients in NYCThere is often a great deal of confusion about whether a mortgage contingency clause is “necessary.”

The conventional explanation given is that buyers should request the clause. It gives them added protection if they are applying for financing. At the same time, sellers should avoid the mortgage Contingency Clause. It may result in delays caused by the buyer’s loan approval process. Delays can also be caused by finding a new buyer if the buyer “in contract” cancels under this clause.

The financing contingency is a contract contingency; therefore, it only takes effect after a listing is “in contract.” That the financing contingency protects the buyer after executing a purchase contract, a mortgage contingency provides the buyer with a way out of the contract if he cannot secure a commitment letter within a specified contingency period (30 to 45 days after the property is “in contract”).

Is a mortgage contingency necessary?

Whether a mortgage contingency clause in NYC is “necessary” depends on several factors, including:

  1. The financial status of the buyer.
  2. The appraised value of the unit for sale.
  3. In the case of co-ops and condos, the financial viability of the cooperative or condominium community of which the unit is a part.
  4. Overall real estate market conditions (e.g., buyer’s market, seller’s market, lender’s market).

Coop buyers looking at a floorplanFor example, a relatively wealthy individual buying a co-op unit applies for a mortgage. The unit appraises below the contract price, and the financial condition does not satisfy the bank’s underwriters. In this case, the bank may deny the buyer a mortgage. Conversely, a person with relatively more minor wealth buying a condo that appraises exceptionally high in a financially solid building might be approved.

And in either case, the overall real estate market conditions may result in a very different reality. For example, in a “seller’s market,” a seller has prospective buyers banging down the door with offers well above the asking price.

That seller will have little incentive to agree to a mortgage contingency. However, in a “buyer’s market,” the same seller might have no other option but to include the contingency or lose a potential buyer.

There is no “standard” Clause, although several standard clauses are circulating through the industry.

Mortgage Contingency Clause in NYC in real estate contractSome Mortgage Contingency Clauses act like protective bubbles surrounding the buyer for a time. Then they “pop” and disappear altogether once meeting certain conditions. Other clauses act more like shields that guard the buyer against certain situations throughout the contract process.

It may be possible to find a middle ground. Satisfy the buyer’s need for financial protection while reassuring the seller that the contingency period will be short.

This concept is a rather broad term that attorneys can negotiate. For example, the buyer’s attorney can negotiate minimum loan amount language. This clause allows the buyer to cancel the contract if he can’t secure financing for a negotiated threshold. Another angle is to include an appraisal contingency.

This clause allows the buyer to cancel the contract if the appraisal comes in lower than a certain threshold (usually the contract price minus a few percentage points).

Therefore, we strongly urge prospective buyers and sellers to consult with their attorneys about this Mortgage Contingency Clause.

Consult about the process of negotiating a deal from the time of acceptance to signing the contract, all the way to closing. It is straightforward to ask your attorney for samples and examples of mortgage contingency clauses.

Written By: Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.

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