There are times when buyers may wish to waive their mortgage contingency clause. With New York City inventory tight, you can help level the field with all-cash offers by doing so. However, we advise using it judiciously since there are pitfalls that you need to be aware of given you are risking your down payment.
We explain the mortgage contingency clause, and when it is advisable to use it to bolster your offer.
What is a mortgage contingency?
Once you agree to terms, a mortgage contingency is a standard part of the contract. This means the buyer has a certain amount of time (typically, 30 or 60 days) to obtain a mortgage. Otherwise, he/she can back out of the deal without penalty, and any money paid to date gets refunded.
There are a couple of caveats that usually apply. The buyer must make a “good faith” effort to obtain a loan, filling out the loan application accurately, and following through with a bank’s requested information promptly.
Once the bank approves your loan application, the buyer has to go through with the purchase, unless there are other contingencies in place.
When to waive your right
While a mortgage contingency is in place to protect the buyer, there are times when you should consider waiving this right. You should do this when you want the unit; it is a very desirable property, and, therefore, you find yourself in a competitive bidding situation. We recently discussed “best and final” offer situations where you can strengthen your offer by placing fewer contingencies.
If you are competing with all-cash bids, waiving your mortgage contingency makes your offer much more competitive. Of course, if the seller receives a cash offer with an easy close and no conditions, which is also higher than your bid, you do not stand much of a chance.
What’s at risk?
You need confidence that you will be able to obtain a mortgage within the prescribed time frame. If you fail to do so, you risk forking over your deposit to the seller, which easily could be a five or even a six-figure amount.
Obtaining pre-approval can mitigate your risk greatly. However, a change in the economy (causing lending standards to tighten) or your employment situation could cause the bank to balk at extending you the loan. In this case, a backup plan where you have alternative sources of financing, borrowing from friends/relatives or tapping your retirement plan, is handy.
The lender could also come in with a lower than expected appraisal. In this case, the bank will only extend you a certain amount of credit. It is then up to you to come up with the additional funds.
It’s not all-or-nothing
You do not have to waive the mortgage contingency entirely. You can put in that you have to obtain a mortgage unless the bank refuses to make the loan due to circumstances beyond the buyer’s direct control, such as his/her financial position. However, this does not put you in as strong a position than entirely waiving the mortgage contingency clause.
If you choose to waive the mortgage contingency, we advise keeping it in place based on the building. You may be confident in your ability to obtain a mortgage based on your credit and financials, but the bank also has to extend the loan based on the building. It could deny the loan based on any number of circumstances. These include the building’s poor financials, liens, litigation, or even if the sponsor holds too many units.
While this may not put you in as strong a position, this protects you from events outside of your control.