The Real.Est List
Yes, you are still nuts to buy without a mortgage contingency
One NYC seller recently took to a StreetEasy forum to ask whether or not mortgage contingencies are still showing up on real estate contracts. And the answer was a resounding "Yes."
Though in some rare cases a seller may insist on (and can get away with) taking a mortgage contingency out of a contract (or adding a non-contingency clause in), contingencies are still the norm.
"Most buyers will not sign a contract if you insist that there be no mortgage contingency," says one StreetEasy commenter. "Of course, the odd buyer here and there may be all-cash or not care, but [as a seller,] you will be losing a vast swath of the market if you refuse to grant a mortgage contingency."
Another commenter warns buyers against going without a contingency. "You will lose your 10 [or 20] percent deposit if you don't get the loan and can't come up with the cash to buy the apartment."
Real estate broker Keith Burkhardt, founder of The Burkhardt Group, agrees: "I always strongly insist a client should not wave his/her right to a financing contingency clause. Better to walk away from such a deal. Even with things improving, the credit markets are still too shaky to risk the loss of such a large amount of money."
Burkhardt also warns, "You have to really examine financing contingency language in new developments (or any contract really). Often there is some pretty unfavorable stuff in there. Like you are forced to accept ANY loan rate that is available to you through the building's preferred lender should a more traditional rate/loan not be available. You want to try and specify 'fixed rate bank financing' in your offer."
Another StreetEasy commenter boasts of walking away from an apartment when the seller insisted on adding a mortgage non-contingency clause. "[It was] a convenient way for a seller to win the lottery if your financing fell through and you had to walk away from the contract (and your down payment)," he says.
BrickUnderground checked in with Manhattan closing lawyer Sandor Krauss, who observes that while mortgage contingencies are important, a funding contingency--ensuring the return of your deposit if the bank decides not to issue the mortgage after approving you as a borrower--may be even more critical.
"With stiffening bank criteria, the collateral is even more important than the creditworthiness of the buyer," says Krauss, referring to instances in which banks decide the building itself isn't mortgage-worthy. "Buyers should always push for a funding contingency, to protect against things not within their control."
Krauss says buyers have been "very successful" lately in negotiating funding contingencies.
Even these days, however, contingencies may be the first casualty in a bidding war.
"Some segments of the market... are seeing multiple offers for many desirable products (low floor, unrenovated, no view are not those). In these best and final situations, some sellers may ask the buyer to submit offers without that contingency for review. Certainly it adds value for the seller, and when the market is right, the seller can get away with it," observes real-estate-broker/market analyst Noah Rosenblatt of UrbanDigs on the StreetEasy thread.
Adds another commenter: "If a property is a little special and goes into a multiple-offer situation (which, yes, does happen even in this slow market) then the seller may well ask bidders to skip the contingency to win the bid. And potential buyers will."
As we've noted before, a creative middle-ground alternative is the hybrid contingency, in which buyers agree to forfeit a fixed amount of money--less than the contract deposit, but a nice consolation prize for the seller--if the buyer can't get financing.