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 wants to buy a home and 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, his earnest money deposit.

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 Don’t confuse the “commitment letter” with the “pre-approval letter.” A pre-approval letter is typically a non-binding letter. This letter carries very little legal weight. 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 will push to avoid the mortgage Contingency Clause. It may result in delays caused by the buyer’s loan approval process.

Additional delays can occur if the first buyer is not able to secure financing and executes the mortgage contingency clause. In that case the seller needs to begin the process of finding a new buyer to purchase the home.

The financing contingency is a purchase agreement contingency; therefore, it only takes effect after a listing is “in contract” and therefore legally binding. 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 condo 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 y 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.

Why do sellers in NYC disapprove of mortgage contingency clauses?

Sellers in NYC are often averse to doing a deal with a mortgage-contingent buyer because there are usually lots of buyers to choose from.

In a strong housing market a seller may receive multiple offers. This means there is a large ‘opportunity cost’ and risk for the seller to go with the mortgage contingent offer over an all-cash offer. This can happen even if the financed buyer’s offer price is marginally higher.

A seller signs a contract with a mortgage contingent buyer. Therefore the clause is ultimately activated, the deal falls apart, and the seller has lost 30-60 days of precious marketing time.

How can I minimize my risk if I’ve decided to submit a non-contingent offer?

Assuming you are pre-approved by a major bank and have confirmed with them that your building is on the list of approved buildings; most likely you will get approved.

If the bank has approved you but not your building, they should be able to tell you whether or not the building gets approved before you commit to signing the contract.

If you are competing against an all-cash and/or non-contingent offer but are not willing to forego the entire mortgage contingency, there are options. You could break down the contingency into a few components to effectively manage risk while making your offer as competitive as possible.

As a sweetener to the seller, you could agree to cover the financial risk of a low appraisal. Do this only if you have a backup plan for making up the shortfall (we discuss this in more depth below).

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 is 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, and walk away from the deal, if the appraisal comes in lower 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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