The Mortgage Contingency Clause
The Real Deal posted a front page article earlier this month on the growing popularity of mortgage contingency clauses found within buyers’ purchase contracts. For those who aren’t familiar, this is a provision in the purchase contract in which the buyer is only obligated to the sale if he/she is able to get a mortgage. Put another way, the buyer doesn’t risk losing their deposit--often 10% or more--if factors affecting the credit markets force them out of a deal.
Most sellers understand that outside factors which affect banks (such as a bank’s ability to resell their mortgages elsewhere) can cause the seller a delay or even a denial of financing. Because this could happen to a buyer with substantial income/assets and a high credit score, it would be unfair to cause them to lose a down payment because of market conditions. This is why buyer’s attorneys have been more conservative lately on the wording of these clauses.
On the other hand, the sellers often do not want this clause because in the past it has been used to provide protection for unqualified buyers who are trying to bite on a big purchase and hope the banks will offer them a loan. Sellers might also suspect that buyers are using the clause as an overall escape route from a purchase. It could be a way of buying time while they further examine the market and analyze other pending deals.
Some different or more detailed clauses might also cap the interest rate on the loan. This would give the buyer a right to exit if rates jump substantially between accepted offer and closing. When I bought my apartment six months ago the interest rates were very volatile. The rates for a 30-year fixed were swinging by almost a quarter of a point each week. Just before the closing the bank informed me that they could close on schedule but only with a rate that was 1/8th of a point above my expected rate. In my case I took the higher rate because it meant not extending the lease on my pricey rental. But as you can see, these clauses are added in for a reason, especially in a housing market like we’re seeing right now.
It should be noted, since many of my readers are in the New York area, that new condominium developments typically don’t allow mortgage contingency clauses and don’t negotiate on that point. This issue is more about existing home sales. Please feel free to e-mail me with questions or comments.
Russell Bailyn
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Wealth Manager
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
