Mortgage Contingency Explained
Buying a property is one of the most important decisions most of us will make in our lifetimes. While we hear a lot about both domestic and foreign buyers with all-cash offers, the bulk of the purchases are still subject to financing. This “mortgage contingency” clause is perhaps one of the most important provisions in a purchase contract. A mortgage contingency provision is designed to allow the Buyer a certain period of time to obtain a Mortgage Commitment from a lender. Simply stated, this is a clause whereby if the buyer cannot secure a mortgage loan within a stated period of time, either party is free to cancel the transaction if within the contingency period the buyer obtains a denial from a lender and properly notifies a seller.
Some contracts call for the buyer to only apply to an Institutional Lender, defined as a conventional bank or mortgage banker. Other contracts include mortgage brokers in the definition of the Institutional Lender. Make sure before you reach out to a broker, you look at this definition carefully. A broker like Panam Mortgage & Financial Services, Inc. (“Pan Am Mortgage”), unlike lenders or bankers, has more options. Pan Am has relationships with over 50 wholesale lenders and we update all rates and programs on a daily basis as opposed to having a single option at one lender. We can generally obtain financing for unconventional properties or borrowers, or for amounts that greatly exceed Fannie Mae and Freddie Mac limits. We have relationships with banks who will keep and service their loans.
Many a times, borrowers will equate a pre-approval letter to a mortgage commitment. Most brokers issue pre-approval letters if borrowers meet the basic requirements for a loan, i.e., they have sufficient income, assets and the requisite credit score to qualify for a mortgage. However, underwriters actually scrutinize these metrics before a commitment is issued. They analyze the length of employment, check asset seasoning, independently verify income and assets, review other liabilities, review property condition and appraisal and check the title of the property before actually approving the loan. Thus unlike a pre-approval, a mortgage commitment is a firm obligation by a lender to lend.
Depending on the type of loan, the contingency generally permits 30 to 60 days to obtain a loan commitment. Make sure both you and your attorney calendar this date. If you forget to get a denial or request an extension after your time to get mortgage expires, and if the grace period of 5 days to notify seller ends in most contracts passes, you will have waived the contingency and are liable to either close all cash or lose your down payment. Buyers should keep in mind that since TILA-RESPA Integrated Disclosures (“TRID”) recently implemented by Dodd-Frank Consumer Protection and Wall Street Reform Act (“Dodd-Frank”) went into effect, the average time to close a loan has increased, up to 50 total days on average in January 2016 as compared to 40 days in January 2015. If you are purchasing a co-op in New York, the closing process is stretched out even more as you cannot submit your board package unless you first obtain and include a loan commitment.
Borrowers who fail to understand how a mortgage contingency works may fail to comprehend the risks associated with the transaction, including the risk of losing their down payment should they fail to timely qualify for a mortgage or timely cancel. In an expensive market like New York City where the typical down payment is 10% or more, this can amount to a huge loss. A mortgage contingency provides critical protection in that it allows borrowers to cancel the contract without penalty. In a competitive market with little inventory, a Buyer might be tempted to waive the mortgage contingency clause in order to make their offer look more attractive. We strictly advise borrowers that unless they have the funds to pay all cash, they should not waive the mortgage contingency clause.
Balram Kakkar, Esq., CEO, NMLS # 3500
Panam Mortgage & Financial Services, Inc. NMLS # 3360