Finance Contingency: Not For Me?
Let me first start by stating that I am not a real estate attorney and that you should always discuss with your attorney topics of this nature. Before considering removing the mortgage contingency in the sales contract it is best to consult your attorney to assess the amount of risk for your current situation.
With almost every sale the question of the buyers willingess to remove the mortgage contingency comes into play. From my experience, people who have purchased multiple properties generally are not concerned with removing the contingency while the first or second time buyer may be terrified by the idea. Let's take a look why.
According to Freeadvice.com: 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.
Below are some common reasons why someone could run into problems obtaining financing:
1. Low Credit Score
2. Lack of Income
3. Lack of Assets
4. Apartment does not appraise for the contract price and the bank will not cover the gap. (was a common situation in Manhattan Condo's where the purchasers were obtaining 90% financing or more)
5. Building may have a low owner occupancy rate, pending lawsuits or another situation that the bank may consider problematic.
6. Loss of Employment
You know your financial situation better than anyone and with the help of a trustworthy mortgage broker should easily be able to anticipate any problems with the bank. However, it has been my experience that in the last few years banks would pretty much loan to anyone with a pulse.
Number 4 listed above (Apartment Does Not Appraise For Contract Price) is particularly interesting because in the past coulple of years low appraisals were very common. The recently sold comparable sales that appraisers and brokers use to evaluate a property's price could not keep up with the fast paced market. Many apartments were flipped for absurd profits within months of closings even after the original appraisals had come in under the sale price. Bottom line: If you are a seller who is considering removing the finance contingency you better be sure the apartment is selling at or under market value or make sure the buyer is putting at least 20% down. Ask your broker what has recently sold in the apartment as well as the neighborhood.
Number 5 listed above (Building Has Low Owner/Occupancy Rate) should not be a concern if you trust your attoney to be thorough with their due dilligence and your lending bank has approved the loan on the building. Upon reviewing the building's financial statements, the offering plan, and the board minutes your attorney should be able to anticipate any potential problems.
I have seen someone lose a $100,000 downpayment because they lost their job prior to closing. Banks will double check your employment status within 3 days of the closing date. In this particular situation the purchaser was laid off 2 weeks prior to closing. When the bank contacted the employer and learned that the purchaser was laid off, they refused to commit to the loan and allow the deal to close. The developer saw an opportunity to make a quick buck and took it.
Long story short; If you are a buyer and have financial stability, good credit and a team of professionals that you can trust to protect you, you can rest much easier removing the financing contingency and using that as a negotiation tactic. Be very cautions and best of luck.
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