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.
Simply put, a mortgage contingency clause in NYC 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, then the buyer may elect to cancel the contract. Then the buyer receives the return of the initial downpayment.
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. It is issued by a bank before conducting a more detailed investigation of the borrower and the property.
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 clause. It may result in delays caused by the buyer’s loan approval process. Delays can also be caused by having to find a new buyer if the buyer “in contract” cancels under this clause.
Whether a mortgage contingency clause in NYC is “necessary” depends on several factors, including:
For example, say a relatively wealthy individual buying a co-op unit applies for a mortgage. The unit appraises below the contract price and the financial condition of the co-op does not satisfy the bank’s underwriters. In this case, the buyer may be denied a mortgage. On the opposite, a person with relatively less 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 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.
Some clauses act like protective bubbles that surround the buyer for a time. Then they “pop” and disappear altogether once certain conditions are met. Other clauses act more like shields that guard the buyer from certain conditions throughout the entire 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.
Therefore, we strongly urge prospective buyers and sellers to consult with their attorneys about this clause. Consult in particular about the overall process of negotiating a deal from the time of acceptance to signing the contract, all the way to closing.