Property Grunt

Saturday, January 01, 2005

Mortgage Contingency

When the contract is being prepared to purchase a residence what is often inserted in the contract is a mortgage contingency clause. According to the American Bar Association a mortgage contingency is the following.

Common provision allows the buyer a certain period of time to obtain a commitment for financing at a specified interest rate for a certain amount of money. It usually lasts for 30 to 60 days, depending on the average time needed to obtain a loan commitment.

A mortgage-contingency rider provides critical protection to the buyer. For example, it allows the buyer to void the purchase contract without penalty in those cases in which the buyer is unable to obtain financing on the terms specified in the contract after making a reasonable or good faith effort to do so within the time provided. Because this type of clause favors the buyer, some real estate agents suggest that the buyer obtain "pre-qualification" from a lender, which gives the seller a degree of confidence that the buyer will not use the clause to void the contract unless some extraordinary circumstance arises.

Upon signing the contract, a down payment is given by the buyer to the seller who will take the property off the market. The contingency allows the buyer to retrieve the down payment if they can't get a mortgage or if the Coop board rejects the buyer.

However the clause can be waived:

Seller may refuse to agree to a mortgage-contingency rider. This can and does happen in a very hot seller's market-in which case; there is not much the buyer can do. But the absence of a mortgage-contingency rider might mean that the buyer will be forced to finance his or her home purchase at an unfavorable interest rate. Because of this risk, buyers should be cautious about signing a purchase contract that does not contain this clause.

This is becoming more frequent in Manhattan because it is a seller's market. Bidding wars have been breaking out left and right and by waiving the contingency agreement it shows how serious the buyers are. But its not recommended.

Waiving the mortgage contingency is a decision that should not be taken lightly. You need to evaluate the risk and reward and better be sure that the apartment is worht the risk.