Waiving the mortgage contingency clause when buying a property in NYC can sometimes be the only way to compete with all-cash or non-contingent buyers. In this article, we define and explain the concept of a mortgage contingency clause as well as the risks of waiving the mortgage contingency when submitting an offer on a home in NYC.
What is the definition of a mortgage contingency clause?
A mortgage contingency clause in a NYC real estate contract gives the buyer the right to back out of a deal and recoup his/her deposit in the event that he/she is unable to obtain financing within a specified period of time. This contrasts with a deal where there is no mortgage contingency, under which the buyer is still responsible for coming up with the remainder of the purchase price at closing even if the bank does not agree to provide a loan.
The mortgage contingency clause is meant to protect a buyer’s deposit and safeguard his or her ability to back out of the deal if for some reason the bank ultimately declines to provide a mortgage. While the language of each mortgage contingency varies by deal, a mortgage contingency clause in NYC will usually only permit the buyer to back out and recover the deposit if he/she does not directly cause the financing to fail through some act of bad faith.
Specifically, for the mortgage contingency right to be applicable the buyer usually must abide by the following terms:
The buyer must agree to apply in good faith for the loan within some specified time period after the receipt of a fully executed contract.
The buyer must fill out the loan application in a truthful and accurate manner and furnish all information required by the lender.
The buyer must comply with all terms presented by the lender as part of the loan application process.
The buyer cannot borrow more than what is specified in the mortgage contingency.
A mortgage contingency clause in New York also usually protects a buyer against having to come up with the funds for the purchase in the event that a bank won’t lend as a result of a dispute with the co-op corporation. Because buyers of co-ops in NYC are purchasing shares of a corporation as opposed to real property, the traditional means of protection for the lender do not exist. As a result, before extending a loan the lender must have a ‘recognition agreement’ in place with the co-op. This agreement gives the Institutional Lender protection in the event the buyer is unable to meet the payment terms of the loan.
As soon as a buyer receives his or her loan commitment letter, he/she must proceed with the deal and is no longer able to activate the contingency, back out of the deal and recover the contract deposit.
Why do buyers in NYC often waive the mortgage contingency clause?
It’s no secret that New York City real estate is considered of the most treasured assets in the world. As a result of limited inventory and tremendous demand, the New York City real estate market is extremely competitive for buyers. Although they pay the highest real estate commissions worldwide, sellers in NYC are therefore in the privileged position of having a large number of prospective buyers to choose from.
A seller in NYC will usually review offers alongside his/her listing agent and prioritize them as follows:
All-cash, non-contingent offers
All cash, contingent offers
Financed, non-contingent offers
Financed, contingent offers