Mortgage Contingency Clause Got You Down?

Weary about waiving the mortgage contingency clause? Try this...

First, a little bit about the mortgage contingency clause. A "mortgage contingency clause" is a provision in the home purchase contract that says that if the prospective buyer can’t get a mortgage within a fixed period of time, s/he can call the whole deal off. In other words, the agreement is conditional on the buyer being able to obtain a mortgage on the property.

Given the current seller's market, it is assumed that the buyer will waive the mortgage contingency clause, forfeiting their down payment if they can't get a mortgage. If this has you worried, take comfort in that you're not alone and there is a workaround!

If you have a great mortgage professional, they can "rush" the appraisal of the property and produce a commitment letter within 24 hours of receiving the appraisal report - this all happens before contracts go out to the buyer's attorney. At that point, the mortgage contingency is a moot point and can be waived with the confidence that you are guaranteed a mortgage for a proper amount. As always, consult your attorney and mortgage professional before heading down this road, and make note that this workaround isn't recommended when there are multiple bids on the table (a.k.a. "bidding war"), as the seller will likely entertain the offer that waives the mortgage contingency without any "headaches."

Waive "bye-bye" to the Mortgage Contingency clause...

It is once again a seller's market in Manhattan. Open houses are like cattle calls and bidding wars are more common than not. When submitting an offer for an apartment, sellers will typically require that you specify one of the following: 1) This offer is contingent upon financing, or 2) This offer is not contingent upon financing and I am willing to waive the mortgage contingency clause in the sales contract (a.k.a. this deal is getting done come hell or high water). Sellers prefer the latter, as it conveys the seriousness of the buyer's offer. Don't be surprised if your lower bid is accepted over a competing higher bid, simply because you are willing to waive the mortgage contingency clause in the sales contract and the competing bid is not. Buying in Manhattan is a unique opportunity, to say the least.

I don't recommend that you waive the mortgage contingency clause if you don't have sufficient cash reserves to cover any discrepancy between the mortgage you were pre-approved for and the actual mortgage you are awarded (based on the appraisal of the premises). You may be pre-approved for a $350,000 mortgage, but upon receipt of the appraisal report, you may only receive $300,000 from your lending institution. You'll need to come up with that $50,000 difference out-of-pocket, if you waive the mortgage contingency clause in the sales contract. If you can't come up with the $50,000, your 10% down (good faith deposit submitted with the signed contracts) is gone forever. Ouch!

And yes, I've intentionally mispelled "Waive" in the title of this blog entry. How's that for a play on words?