What is a mortgage contingency and how does it work?
We’ll break down this means and explain what the ramifications are.
My name is John Moss, an attorney and partner at Moss & Moss LLP, a law firm started by
my family in 1997.
A large portion of our work is residential real estate transactions, and let’s dig
in.
To start with, a mortgage contingency in a real estate contract isn’t really what it
sounds like.
A mortgage contingency means that the contract is contingent on the buyer getting a mortgage
commitment letter, nothing more.
And to be clear on what a mortgage commitment letter is, we have to take a step back and
go through the mortgage process in a little bit of detail.
At the beginning, when you’re shopping for real estate, your broker or whomever else
will tell you to get a pre-approval letter.
Many (but not all) pre-approval letters aren’t worth much, since the banks take only minimal
information from you to issue it.
Generally speaking, you won’t submit the formal mortgage application until you’ve
signed the purchase contract.
At that point, you’ll provide all the information the bank requires in order to fully analyze
your file (what they call “underwriting”) and hopefully approve you for a mortgage.
When the bank has fully approved you, they will issue a mortgage commitment letter to
you.
Technically, it’s a contract stating that the bank will lend you a certain amount of
money at a certain interest rate in order to buy a specific piece of real property.
Historically, the commitment letter didn’t have any conditions on it, but these days
the commitment letter will have lots.
The banks will make the commitment letter conditioned on things like whether you keep
your job, whether you keep making the same salary, whether you stay alive, and whether
or not you get them that one last tax return that you promised to send in.
If you DON’T satisfy these conditions, the bank can void the commitment letter and not
fund the loan.
That is, even if the bank issues a commitment letter, the bank doesn’t NECESSARILY have
to fund the loan.
HOWEVER, it is EXTREMELY rare that this happens.
In fact, I can’t remember an instance in my practice where the bank didn’t fund the
loan.
But there is a non-zero possibility of this happening.
So getting back to the mortgage contingency, the contract is conditioned on you as a buyer
getting this commitment letter from the bank.
If you don’t get it within 30 days or 45 days or whatever timeframe your attorney negotiated,
you can cancel the contract, get your deposit back, and walk away…assuming of course that
you did everything you were supposed to do and acted in good faith.
Or alternatively if you get rejected by the bank for a commitment letter, again you can
walk away if you were acting in good faith the whole time.
But the contingency is limited to those two situations: that is, you didn’t get your
commitment letter in time or you got rejected.
And if the lender does the appraisal of the apartment or house that you’re looking at
AFTER the commitment letter is issued, and if the appraisal comes in lower than the purchase
price, that could void the commitment letter.
Or – this being the time of COVID – if you lose your job after the commitment letter
is issued, that could also void the commitment letter.
That being said, as a purchaser, your lawyer can ask for a funding contingency, meaning
that the contract is contingent on the bank actually bringing money to the closing table…but
realistically, almost every selling attorney will simply say no to that request.
To be blunt, when I’m a seller’s attorney, I generally say no, too.
There are rare instances where it makes sense, but in order to have a seller’s attorney
agree to a funding contingency, you as a buyer better have a really compelling reason AND
a lot of leverage in order to get it.
So where does that leave you?
Firstly, understand that while a real estate contract in New York is technically contingent
on you getting a mortgage commitment, really once you sign the contract you are bound to
buy the apartment.
In many jurisdictions, contracts are genuinely contingent on attorney’s review or otherwise…not
so much in New York.
Also be aware that if you are working with a broker and they’re not completely incompetent,
it really isn’t that difficult to qualify for a mortgage for your purchase.
A decent broker will ensure that the buyer is looking only at things that they actually
will qualify for, so if something really goes sideways with the mortgage, you can be pretty
confident that you can go to another lender and get back on track.
Also, if there is a major delay or your lender doesn’t pan out, your attorney can generally
ask for more time from the seller.
The seller wants to sell and usually it will take longer to find a new buyer rather than
just giving you an extra few weeks to get things done.
So having your attorney be in regular communication with the seller’s attorney, if they’re
not already, will definitely help a lot.
So that’s more or less what a mortgage contingency is all about.
Definitely ask your attorney about the specifics and – as always – make sure you understand
what’s in the contract you’re signing.
If your attorney doesn’t explain what it means or if you don’t feel comfortable with
the answer, just ask more questions.
You should never sign a contract if you don’t feel like you have a good handle on what’s
in it.
I hope this was helpful and informative.
And of course, if you are in need of legal services, please contact us at www.mossandmoss.com,
the spelling is below.
We look forward to being of assistance.
Again, my name is John Moss and thank you for watching.