Mortgage Contingency

fairly common for new developments...your atty will advise you. certainly you can try to play hard and insist on leaving it in the contract, and see if the sponsor will lose a deal over this; doubtful i think.

if they are, then really talk to lenders and your atty to understand the risks and make sure you can secure financing at the end of the day

search here for "mortgage contingency" to see some helpful discussions of this in a number of other threads.

Mortgage contingency was common in the past. No longer a must if you object because of the market. In new developments or sponsor sales with many units for sale, the seller does not have the leverage they use to have.

Concern is that apparently Fannie Mae has instituted new guidelines that require condos and coops to present certain information on their annual budgets. So even if the buyer is 100% qualified, if the building isn't compliant yet (or at all) then the bank could reject the mortgage. This is apparently new and so many condos have not yet adjusted their reporting budget (they need to state in the budget that they have 10% set aside for reserves).

Try to get pre qualified for your mortgage. Then at least you can feel reasonably safe when signing the contract. But new developments are not giving a mortgage contingency. Also see how many untis in the development have alredy sold. If it is approaching the 51% level then you know that you will be able to apply for your mortgage sooner rather than later. Some private banks are giving loans with less than 51% sold.
www.esfunding.instantlender.com

Its not a new development. Its a purchase from a sponsor on an apt where the original renter finally moved.

We are leaning towards insisting on the contingency or walking over it. Don't think I'd be able to sleep well knowing that there is a risk of losing 100k. Prequalification is meaningless since it doesn't look at the building details.

Yes, insists or walk away. 100k is 100k, pre-qualification or pre-approval isn't a guarantee of the mortgage.

You want a contingency. Period. It's absurb in this market with lending the way that you would consider doing without. Why on earth do people feel that there's a stigma for folks who want a mortgage contingency? In NYC I can think of a million reasons why you may not get funding at the last minute which you may not have any control over including; terrorist attacks, 'nother bank goes under, etc.

Why won't they bend on the contingency? IN a similar situation. That's such a big risk for the buyer. Basically without a contigency is similar to a cash offer.

Agreed on the mortgage contingency. It is a must have or walk.

I don't understand why this is even a question. Unless you have enough in the bank to comfortably pay cash for the property, you need a mortgage contingency. Period. If the sponsor doesn't understand that, walk - it's obviously a property managed by people who are not in touch with reality. And chances are this isn't the only place where they're willing to put you at risk for their own benefit.

There are no guarantees in life. But this is a fact; that new developments cannot afford to tie up a unit and lose other buyers.

If this is not a new development, I don't see why the sponsor won't bend. A lot of sponsors even offer financing.

If it's a sponsor unit in a new development, I would not waive mortgage contingency. If you are buying a sponsor unit in an establilshed building that is being sold at a significant discount (sponsor units sometimes are due to condition issues), you could forgo mortgage contingency, but I would get an appraiser in there before you sign contract to make sure it appraises for what you're willing to pay.

Contingency or no deal -- absolutely non-negotiable.

I was in a situation recently where I was approved, but the building couldn't get Fannie Mae approval -- without the contingency, the sponsor would have been entitled to keep $100,000. That money would be to compensate them for...what, exactly? Being unable to get their apartment approved? It is not your job to insure their ability to sell the apartment -- if their apartment can't be financed, then it should be their problem.

Consider this: they have more information than you do. Do they know something about the building that they suspect may block financing? Are you willing to PAY them to help them figure out if their apartment is sellable? No? Then you need a contingency.

If they absolutely won't give you one, think long and hard about why not -- I guarantee you it's not because they think financing will be smooth sailing.

"But new developments are not giving a mortgage contingency."

I have first hand knowledge that some will. I'll add my voice to the chorus that says get the contingency, or walk away.

back ages ages ago, 1980's.... there was NEVER a question there is a mortgage contingency... it's the effect of the bubbble ppl are even questioning this.... LAST TIME I CHKED.. bubble gone... some holders on, some borkers not accepting their dwindling bank accts.... some flippers gonna go back to McD flipping.... just a matter of time... and dont' mind the dow 1K swings... ABSOLUTELY will NOT affect bank's commitment to close.... FLMAO

streetsmart

There are no guarantees in life. But this is a fact; that new developments cannot afford to tie up a unit and lose other buyers.

Intuitively I would think the opposite - an individual owner only has that single unit for sale, and thus would be much more reticent to tie it up and risk losing the sale b/c the buyer can't get financed. A new development, however, has multiple units for sale - outside of the odd one-of-a kind penthouse, tying up say the 5th floor B line wouldn't be a big deal as they have 10 other units in that line for sale.

i definitely agree with printer. especially these days, when most aren't coming close to having all units in contract prior to the start of closings.

I’m author of the book, The NY Co-op Bible (good for condos, too), that addresses many issues of buying and selling. From my experience it’s highly unusual for a sponsor in an established building to demand a contract without a mortgage contingency. But the real issue is what’s prudent for you. If you don’t have sufficient liquid assets available – in the bank, from mom and dad, or your rich Uncle Morrie – signing a contract without such a contingency is potential financial suicide. As others have mentioned, without such a contingency if you don’t get the cash to close on the deal, you will lose your deposit.

In this economic environment, banks may refuse to lend not just because they don’t like the buyer’s finances, but because they aren’t satisfied with those of the building. It could be one of any number of reasons – insufficient cash reserves or cash flow, too many sponsor units or too many sublets – even the lack of a sufficiently large fidelity bond.

Even if you do succeed in obtaining a contract with a mortgage contingency, you should take care that it adequately protects you, especially in this market. One way is to specify in the contract the minimum loan terms that are acceptable to you.

Another way is to shift the risk. In the standard contract, the buyer is stuck if his financial circumstances change after having obtained a mortgage. But today nobody knows if they’ll have their job tomorrow. You can provide an escape hatch by adding a rider that lets you cancel if your situation changes post- commitment. These protections saved several recent buyers. You might want to have a look at www.coopbible.com

Underwriting rules have changed and regardless of your financial health, if the building you are buying into has something as innocuous as a mortgage due for refinancing in less than 3 yrs, Fanny Mae will not underwrite a fixed rate loan. You won't know any of those building details until you sign. If the seller insists on no contingency, then you insist on a copy of the financial statements before you sign. Simple.

Is it possible that even I get a loan commitment letter, but at the end bank refuses to give me the money? In that case, what are the reasons typically?

Because the contingency clause seems to only tie to "Loan Commitment Letter" - it says Purchaser may apply for financing in connection with this sale and Purchaser's obligation to purchase under this Contract is contingent upon issuance of a Loan Commitment Letter by the
Loan Commitment Date.

HKbuyer - I has similar concerns regarding our mortgage. I don't know what would legally prevent the bank from pulling their commitment unless you could sue them for breach of contract. However, if they've gone as far as issuing their commitment then they would likely want the deal to go through unless there's a very hisk risk for them, or your lied on the loan application.
If you're really concerned about your financials or your bank then I would suggest having 1 or 2 other banks start working on mortgage commitments for you.

You should be able to go all the way up to appraisal without having to pay any fees.

HKbuyer and mmarquez110: the questions you raise here are of such major importance that you must discuss them with a real estate attorney for any real guidance as to how to proceed. Assuming what the banks "would likely want," what you logically "should be able to do," or speculating as to why a bank would not have to/choose to follow through on a commitment letter serves no useful purpose. This arises in what is for most people the most expensive purchase of their lives--use professionals for answers you can actually rely upon. In all likelihood, the "commitments" are worded in such a way that the banks can do whatever they want to. Banks are also not monoliths--especially in the mortgage area. They are organizations staffed with a zillion automatons and back office drones who don't "want" anything other than to have no headaches from their employers. They often barely understand the rules they operate under and are the epitome of bureaucratic morass. You require legal counsel to understand legal documents if you are to protect yourselves.

IMO, you are insane and reckless to waive a mortgage contingency unless you have to ability to close the deal with cash if it becomes necessary.

HK -- If one of the mortgage guys is around, they can give a fuller answer, but in my experience a bank refuses to fund a committed loan:

1) when they don't want to -- I had a client caught in that vise when credit was collapsing, and Countrywide was borrowing at 8% and lending at 6%, and they tried not to fund a previously committed loan. I heard that this was happening all over the country; mortgage broker was extremely helpful here in making sure our deal finally closed.

or 2) when circumstances change -- e.g. you lose your job between commitment and closing.

It would also be possible if 3) a condition of commitment to be cleared up before closing is not met -- say funding the loan is contingent on co-op having a certain fidelity bond, and co-op does not get it. In Manhattan the agents work this till it gets done, but I did hear of a situation where this killed a sale in Westchester.

ali r.
DG Neary Realty

"Is it possible that even I get a loan commitment letter, but at the end bank refuses to give me the money? In that case, what are the reasons typically?

Because the contingency clause seems to only tie to "Loan Commitment Letter" - it says Purchaser may apply for financing in connection with this sale and Purchaser's obligation to purchase under this Contract is contingent upon issuance of a Loan Commitment Letter by the
Loan Commitment Date. ?"

The commitment will likely include plenty of outs for the bank. Mine even stated that they could refuse to honor the commitment if they ceased doing business with my mortgage broker, as if that should matter. The bank will be reviewing your employment, income, assets and credit, and a change in any of these might prompt them to pull the commitment. It also has an expiration date, which is usually set 30 days after scheduled closing. The contract will likely state that the commitment must extend that far, and if it doesn't, there's a small risk (with 10%-sized consequences) that the bank won't extend while the seller wishes to close during that period.

HK buyer: it is possible for the bank not to fund your loan after the commitment letter has been issued. This usually happens when there are material changes to the application from the time it was approved. For example, loss of job, decrease in income, decrease in assets, credit score changes, or if something comes up where the buyers may have been trying to hide. This doesnt happen often or at least not in my experience but it is possible. sunny.hong@bankofamerica.com

kylewest - apparently I can't type. I meant to say that I "had" similar concerns.
We closed nearly a year ago and our mortgage was a major freaking headache up until the very last second of the closing. In fact the purchase almost didn't happen because our bank dragged ass so much. God what an awful experience.

I had my contract written with language that said up until the loan is funded, if anything happens to me, I get my deposit back. Thats the kind of contingency buyers should ask for.

Ive seen a trend in new developments lately where the sponsors are not granting mortgage contingencies. To me, this is both alarming and ridiculous. How short the Developers memories are...

I wouldn't do it either. The bank has a lot of outs as others have mentioned so nothing is absolutely guaranteed. You are right in insisting or walking. It's the responsible approach. Supply is increasing so something else will come up if this doesn't work out. Having come this far, seems like you are in a position to identify what you want as soon as you see it so you can act quickly. I would get started with a mortgage broker or bank now so you can close faster.