How Brooklyn buyers can compete with all-cash offers by waiving the mortgage contingency
Oct 09, 2023
In the competitive world of Brooklyn real estate, where all-cash buyers seem to hold a distinct advantage, aspiring homeowners often find themselves wondering how to level the playing field. One strategy that has gained popularity in recent years is waiving the mortgage contingency. Let’s take a look at what the mortgage contingency is, what it means to waive it, and how you can use this option to leverage an advantage in a competitive market.
Understanding the Mortgage Contingency
The mortgage contingency is a provision found in the standard purchase and sale agreement. It allows a buyer to cancel the contract and receive their deposit back if they cannot secure a loan commitment for the specified loan amount within a set period, typically 30 to 45 days after the contract is executed. However, once the buyer receives a loan commitment for the specified amount, the mortgage contingency is satisfied. Even if the lender refuses to fund the loan at closing, the buyer cannot cancel the contract and get their deposit back under this provision.
To satisfy the mortgage contingency, the loan commitment must be for an amount equal to or greater than the loan amount specified in the contract. This becomes problematic when the property appraises for less than the contract price, as banks typically lend based on the appraised value. So, if a property is contracted for $1,000,000 with 80% financing but appraises for only $950,000, the mortgage contingency may not be satisfied, allowing the buyer to cancel the contract.
The Implications of Waiving the Mortgage Contingency
When a buyer waives the mortgage contingency, they are essentially agreeing to purchase the property regardless of whether they can secure a loan commitment. If they cannot fulfill the contract terms, they risk defaulting, which can result in the forfeiture of their contract deposit, often 10% of the purchase price in New York City.
It’s essential to note that buyers rarely allow such a forfeiture to happen, given the substantial amounts involved in NYC real estate transactions. Therefore, waiving the mortgage contingency is a significant risk that should be approached with caution.
Protecting Yourself When Waiving the Mortgage Contingency
If you’re considering waiving the mortgage contingency to compete with cash buyers, there are several steps you can take to protect yourself:
Consult Your Mortgage Professional: Ensure you have a mortgage pre-approval letter and discuss your likelihood of loan approval with your mortgage professional. Also, check if the building is approved by your lender.
Understand Appraisal Risk: Assess the risk of a low appraisal with your real estate agent. Be prepared for potential out-of-pocket expenses to cover the gap between the purchase price and the loan amount based on the appraised value.
Seek Legal Advice: Talk to your attorney to fully understand the mortgage contingency provision, your obligations, and the risks involved. Consider dividing the mortgage contingency to assume manageable risks.
The Final Word
Waiving the mortgage contingency can indeed make you more competitive against all-cash buyers. However, it’s not a decision to be taken lightly. By consulting with professionals, understanding appraisal risks, and seeking legal advice, you can navigate this strategy effectively. In a competitive market like Brooklyn, having the option to waive the mortgage contingency can be a valuable tool for securing your dream home, but it should always be done with careful consideration and expert guidance.
Realty Collective, LLC does not provide legal advice. This material has been prepared
for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. You should consult your real estate attorney before engaging in any real estate transaction.