Advice on mortgage contingency in these wild times
Started by mmarquez110
over 16 years ago
Posts: 405
Member since: May 2009
Discussion about
We may be going into contract very soon on an apartment, however these wildly increasing interest rates are a big problem. When we initially calculated our finances, we were assuming a 5.0% APR for a 30-year fixed. Two weeks later, rates are nearly 6.0%. We have been pre-qualified for a SONYMA mortgage which is a low-interest subsidized mortgage - currently at 5.25%, but I'm not sure if we... [more]
We may be going into contract very soon on an apartment, however these wildly increasing interest rates are a big problem. When we initially calculated our finances, we were assuming a 5.0% APR for a 30-year fixed. Two weeks later, rates are nearly 6.0%. We have been pre-qualified for a SONYMA mortgage which is a low-interest subsidized mortgage - currently at 5.25%, but I'm not sure if we actually will be approved for one, or how long it will stay at 5.25%
We need a mortgage contingency in the contract, but I am not sure what the seller would reasonably accept. One other problem is that this is a new building which probably will not close for at least 2 months. SONYA will do a 240 day lock-in for new buildings luckily, but I doubt other lenders will wait more than 2 months.
I think that the seller will agree to contingency on closing by Nov. 30th so that we do not miss out on the federal tax credit -- they are confident about closing by then. However, if we go into contract, and then do not qualify for SONYMA, and are only able to get a 6% or even higher rate, then we are basically screwed as we will not be able to afford an extra $200/month. We absolutely cannot walk away from the contract downpayment. Any suggestions? Thanks.
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Response by columbiacounty
over 16 years ago
Posts: 12708
Member since: Jan 2009
if you can't afford an extra $200 a month, you're screwed already. i am confused; you indicate you're not in contract but cannot walk away from contract downpayment. Which is it?
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Response by Pette78
over 16 years ago
Posts: 42
Member since: Aug 2008
I think mmmarquez is saying that they aren't willing to put down the contract downpayment and then lose it, not that they have already put it down. still i agree with columbia, if the $200 extra/month is going to do you in, you should think carefully about whether you can afford the apartment even at the low 5.25% rate. I know the standard contract does allow you to insert the terms of the loan so that it would read that the contract is dependent on you getting financing at x rate for y term, but I'm not sure a seller would accept that.
Other lenders will let you extend the rate (both TD America and B of A charge an extra 1/4 point for every 30 days after the typical 60 day lock) but that can get expensive fast if you need to lock in for 5 months.
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Response by romary
over 16 years ago
Posts: 443
Member since: Aug 2008
on the main point, while i'm all for and have used mortgage contingencies in the past i have to say i concur with cc - if $200 is a deal breaker best to move on now.
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Response by MatWith1T
over 16 years ago
Posts: 66
Member since: Mar 2009
If its a new building you really want that mortgage contingency... if you are having this problem, then so is every other buyer in the building.
If people start to walk before its time to close, you will be lucky to get a 6% mortgage at all, because you might fall below the 70% sold mark and then you won't get any mortgage. If the seller is confident that they can get these deals closed, then it won't matter to them whether there is a contingency. If they are worried people will walk or be unable to finance their purchases, wouldn't you rather be one of the people that got out of their deal instead of one of the people they have to screw in order to recoup those lost dollars?
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Response by liulide
over 16 years ago
Posts: 36
Member since: Jan 2009
ditto cc and romary, if $200/month is too much to bear, you probably can't afford the place to begin with.
personally i would never sign a contract without a mortgage contingency.
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Response by mmarquez110
over 16 years ago
Posts: 405
Member since: May 2009
Perhaps I was overstating when I said "we'd be screwed" I know we're cutting it a little close and appreciate the concern/critique. We can cover the mortgage and proposed maintenance on my wife's salary alone. She has a pretty secure position. We also don't really have any other major necessary expenses other than food - no kids, no health insurance. I am in a temporary lower-paying situation which will improve significantly in the next year. We also have some affirmation from relatives that they would be willing to help out monthly if necessary - they know we're reliable, and that we're in this for the long run.
My main concern is whether or not the seller would allow for a mortgage contingency specifying a certain type of loan. I'm thinking that I would need to specify that we qualify for the SONYA loan or that we can secure another loan at 5.75% or under. Does that sound totally unreasonable?
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Response by Hopeful_Buyer
over 16 years ago
Posts: 38
Member since: Nov 2007
mmarquez110,
Yes, put into the financing contingency the specifications that make sense for YOU. You are correct, it's a crazy world in the financial and real estate markets right now, and you need to protect yourself from the craziness and uncertainty. We closed on a condo last Sept. in similarly crazy times, and had a mortgage contingency at a time when no one was writing mortgage contingencies into contracts. As a result, our seller wanted us to have all the contingencies in the bank's commitment letter satisfied before we signed the purchase and sale agreement. We did this. Then, we went so far as to put a further clause in the purchase and sale contract, that if the bank reneged on its commitment (after having already given it to us) prior to closing, we would be entitled to all except about 10% of our down payment from the seller. Thus, we were covered for the situation where the bank agrees to the financing at a certain rate with certain terms, then, at the last minute, cannot satisfy its commitment for some reason, such as it's bankrupt. So, if our down payment was $50,000, our potential loss was limited to $5,000 in the event that the bank reneged and we couldn't close for that reason. You might be able to negotiate a full refund of your down payment if the bank doesn't come through for any reason. As I said, we were pioneers last September. Even our lawyer couldn't fully understand that we insisted on a financing contingency since the standard at the time was not to have any financing contingencies. I would think that in today's market, you should be able to put very strong language into your financing contingency.
"My main concern is whether or not the seller would allow for a mortgage contingency specifying a certain type of loan. I'm thinking that I would need to specify that we qualify for the SONYA loan or that we can secure another loan at 5.75% or under. Does that sound totally unreasonable?" - I recall that within the financing contingency language there is place to cap the interest rate at which you can get a loan, so yes, your proposal sounds reasonable.
Good luck.
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Response by Rhino86
over 16 years ago
Posts: 4925
Member since: Sep 2006
Are you crazy? What seller is refusing a mortgage contingency at this point?
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Response by romary
over 16 years ago
Posts: 443
Member since: Aug 2008
MM - take allow out of your vocab - don't give them so much hand so to speak. it's a tell on your part, not an ask/sell.
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Response by tina24hour
over 16 years ago
Posts: 720
Member since: Jun 2008
Hopeful_Buyer is my hero! Every agreement is different, and you should make use of the tools available to you to design the best possible contract to suit your situation. Sure, nobody wants to do the extra work, but if you're willing to jump through hoops yourself (satisfying all the bank's contingencies in advance is no picnic), your seller should be happy to agree to the language H_B states above.
That said, I'm not sure we're going to see 5.75% again any time soon, so it may be a lot of work for nothing.
Tina
(Brooklyn broker)
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Response by mmarquez110
over 16 years ago
Posts: 405
Member since: May 2009
Thanks for your advice. Unfortunately I think that 6% may be a more realistic number based on the trends this week.
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Response by ab_11218
over 16 years ago
Posts: 2017
Member since: May 2009
i'm not sure how many sellers will be willing to put in a contingency that is so close to current rate for a closing no later than end of november. i think i saw some contingency like that a few years back, but it was approx 1% higher than the rate was during the contract signing. you're closer to 1/4%.
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Response by Hopeful_Buyer
over 16 years ago
Posts: 38
Member since: Nov 2007
Tina (Brooklyn Broker),
After reading your comment, I have to add that, ironically, we purchased and negotiated the terms of the contract without a broker representing us.
However, a key factor in our purchase decision was the seller's broker. We had had such bad experiences with other sellers' brokers up to that point, that when we encountered a competent broker across from us, the value of the property she represented increased, from our perspective. Let me also say that brokers for one company were so bad that we stopped looking at any properties listed by them, including another property listed by them in the building where we purchased. So, my point is that brokers need to understand trends in the markets and legal language in the contracts. We were negotiating just when the market was flipping from a seller's market to a buyer's market. Too bad that so many brokers could not comprehend, or entertain the idea of, this change at the time.
I also have to add that roughly nine months later we are happy with our purchase. We predicted that prices would decrease, but we also predicted that it would be more difficult to buy -- less good supply, tighter credit -- both of which seem to have occurred. Unlike some of the posters here, we were not interested in moving into a rental until prices fell, then moving again. I also think that in today's market we would have a hard time getting a bank to work with us to satisfy all the contingencies as quickly as our bank did last summer, considering that the same bank has not been able to complete a re-fi for us after working with them for three months now.
mmarquez110,
Here's how we handled the timing of signing contracts last summer. (1) Got commitment letter and lock-in from bank. (Did not sign commitment letter immediately, but worked to satisfy bank's requirements.) (2) Negotiated and signed purchase and sale contract, committing us and seller in the deal; included clauses for financing contingency and refund of down payment if bank reneged. (3) Signed the commitment letter from bank, fully committing bank and us in the deal. Your broker, lawyer and/or banker should be able to help you with this. I am neither broker, nor lawyer nor banker. I am a recent NYC homeowner.
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if you can't afford an extra $200 a month, you're screwed already. i am confused; you indicate you're not in contract but cannot walk away from contract downpayment. Which is it?
I think mmmarquez is saying that they aren't willing to put down the contract downpayment and then lose it, not that they have already put it down. still i agree with columbia, if the $200 extra/month is going to do you in, you should think carefully about whether you can afford the apartment even at the low 5.25% rate. I know the standard contract does allow you to insert the terms of the loan so that it would read that the contract is dependent on you getting financing at x rate for y term, but I'm not sure a seller would accept that.
Other lenders will let you extend the rate (both TD America and B of A charge an extra 1/4 point for every 30 days after the typical 60 day lock) but that can get expensive fast if you need to lock in for 5 months.
on the main point, while i'm all for and have used mortgage contingencies in the past i have to say i concur with cc - if $200 is a deal breaker best to move on now.
If its a new building you really want that mortgage contingency... if you are having this problem, then so is every other buyer in the building.
If people start to walk before its time to close, you will be lucky to get a 6% mortgage at all, because you might fall below the 70% sold mark and then you won't get any mortgage. If the seller is confident that they can get these deals closed, then it won't matter to them whether there is a contingency. If they are worried people will walk or be unable to finance their purchases, wouldn't you rather be one of the people that got out of their deal instead of one of the people they have to screw in order to recoup those lost dollars?
ditto cc and romary, if $200/month is too much to bear, you probably can't afford the place to begin with.
personally i would never sign a contract without a mortgage contingency.
Perhaps I was overstating when I said "we'd be screwed" I know we're cutting it a little close and appreciate the concern/critique. We can cover the mortgage and proposed maintenance on my wife's salary alone. She has a pretty secure position. We also don't really have any other major necessary expenses other than food - no kids, no health insurance. I am in a temporary lower-paying situation which will improve significantly in the next year. We also have some affirmation from relatives that they would be willing to help out monthly if necessary - they know we're reliable, and that we're in this for the long run.
My main concern is whether or not the seller would allow for a mortgage contingency specifying a certain type of loan. I'm thinking that I would need to specify that we qualify for the SONYA loan or that we can secure another loan at 5.75% or under. Does that sound totally unreasonable?
mmarquez110,
Yes, put into the financing contingency the specifications that make sense for YOU. You are correct, it's a crazy world in the financial and real estate markets right now, and you need to protect yourself from the craziness and uncertainty. We closed on a condo last Sept. in similarly crazy times, and had a mortgage contingency at a time when no one was writing mortgage contingencies into contracts. As a result, our seller wanted us to have all the contingencies in the bank's commitment letter satisfied before we signed the purchase and sale agreement. We did this. Then, we went so far as to put a further clause in the purchase and sale contract, that if the bank reneged on its commitment (after having already given it to us) prior to closing, we would be entitled to all except about 10% of our down payment from the seller. Thus, we were covered for the situation where the bank agrees to the financing at a certain rate with certain terms, then, at the last minute, cannot satisfy its commitment for some reason, such as it's bankrupt. So, if our down payment was $50,000, our potential loss was limited to $5,000 in the event that the bank reneged and we couldn't close for that reason. You might be able to negotiate a full refund of your down payment if the bank doesn't come through for any reason. As I said, we were pioneers last September. Even our lawyer couldn't fully understand that we insisted on a financing contingency since the standard at the time was not to have any financing contingencies. I would think that in today's market, you should be able to put very strong language into your financing contingency.
"My main concern is whether or not the seller would allow for a mortgage contingency specifying a certain type of loan. I'm thinking that I would need to specify that we qualify for the SONYA loan or that we can secure another loan at 5.75% or under. Does that sound totally unreasonable?" - I recall that within the financing contingency language there is place to cap the interest rate at which you can get a loan, so yes, your proposal sounds reasonable.
Good luck.
Are you crazy? What seller is refusing a mortgage contingency at this point?
MM - take allow out of your vocab - don't give them so much hand so to speak. it's a tell on your part, not an ask/sell.
Hopeful_Buyer is my hero! Every agreement is different, and you should make use of the tools available to you to design the best possible contract to suit your situation. Sure, nobody wants to do the extra work, but if you're willing to jump through hoops yourself (satisfying all the bank's contingencies in advance is no picnic), your seller should be happy to agree to the language H_B states above.
That said, I'm not sure we're going to see 5.75% again any time soon, so it may be a lot of work for nothing.
Tina
(Brooklyn broker)
Thanks for your advice. Unfortunately I think that 6% may be a more realistic number based on the trends this week.
i'm not sure how many sellers will be willing to put in a contingency that is so close to current rate for a closing no later than end of november. i think i saw some contingency like that a few years back, but it was approx 1% higher than the rate was during the contract signing. you're closer to 1/4%.
Tina (Brooklyn Broker),
After reading your comment, I have to add that, ironically, we purchased and negotiated the terms of the contract without a broker representing us.
However, a key factor in our purchase decision was the seller's broker. We had had such bad experiences with other sellers' brokers up to that point, that when we encountered a competent broker across from us, the value of the property she represented increased, from our perspective. Let me also say that brokers for one company were so bad that we stopped looking at any properties listed by them, including another property listed by them in the building where we purchased. So, my point is that brokers need to understand trends in the markets and legal language in the contracts. We were negotiating just when the market was flipping from a seller's market to a buyer's market. Too bad that so many brokers could not comprehend, or entertain the idea of, this change at the time.
I also have to add that roughly nine months later we are happy with our purchase. We predicted that prices would decrease, but we also predicted that it would be more difficult to buy -- less good supply, tighter credit -- both of which seem to have occurred. Unlike some of the posters here, we were not interested in moving into a rental until prices fell, then moving again. I also think that in today's market we would have a hard time getting a bank to work with us to satisfy all the contingencies as quickly as our bank did last summer, considering that the same bank has not been able to complete a re-fi for us after working with them for three months now.
mmarquez110,
Here's how we handled the timing of signing contracts last summer. (1) Got commitment letter and lock-in from bank. (Did not sign commitment letter immediately, but worked to satisfy bank's requirements.) (2) Negotiated and signed purchase and sale contract, committing us and seller in the deal; included clauses for financing contingency and refund of down payment if bank reneged. (3) Signed the commitment letter from bank, fully committing bank and us in the deal. Your broker, lawyer and/or banker should be able to help you with this. I am neither broker, nor lawyer nor banker. I am a recent NYC homeowner.
-HB