No Finance Contingency Explained
A: A 'NO FINANCE CONTINGENCY' refers to when the Finance Contingency is OMMITTED from the contract of sale by the seller of an apartment to protect themselves in the event that the buyer can NOT secure a loan prior to closing. Should this occur, the buyer will have to come up with cash to buy the apartment at closing or risk losing their 10% deposit. Read The Comments For Detailed Answer By Real Estate Attorney Peter Graubard.
Its amazing that when I google 'No Finance Contingency' I see a past UrbanDigs post as #1 on the search results and then pretty much garbage thereafter to describe what this really is for homebuyers. Lets try to clear it up right here:
Definition of Contingency: An event that may occur but that is not likely or intended; a possibility. A possibility that must be prepared for; a future emergency.
When the New York City housing market was going crazy a year ago (mainly because of no inventory, tons of demand, and lower mortgage rates), it was clearly a sellers market with packed open houses and multiple bids on properties. I recall an office meeting when our sales manager told us that 7/10 deals were going OVER ASK! That is an incredible statistic. In this type of crazed sellers market, many buyers had to deal with a No-Finance Contingency clause being added to the contract of sale. There was not much you could do about it. If you didn't accept the clause and sign the contract, the seller would just move on to the next bid. Not the case in today's market.
Sellers omit the Finance Contingency from the contract of sale to protect themselves from a deal going sour. Once you have a fully executed contract of sale there is not much that a buyer can do to get out of the deal; except not be able to secure a loan! So, the No-Finance Contingency clause protects against this emergency and states that even if the buyer cannot secure a loan prior to closing, they must either come up with all cash or surrender their 10% deposit. In contracts of sale that do NOT have this clause and a buyer cannot secure a loan, the seller is usually out of luck with the buyer getting out of the deal and their deposit back since the deal was contingent on securing financing!
You can see the appeal of doing this by the seller. But in today's market where the dynamic or power has shifted closer to buyers, seller's should find it very difficult to get a contract signed with this clause in it. Talk to your real estate attorney about this and be sure to find out if your contract of sale has this clause in it before you sign; especially if you have bad credit, are self-employed, or have reported declining income on your tax returns from successive years. These are all items that a bank will look at before committing to your loan!
REMEMBER: After the contract is fully executed the bank will send an appraiser over to appraise the value of the property. Assuming the #'s come in where they need to be, the bank will then process the appraisal and work on getting the buyer a loan committment. This loan committment letter is needed to submit to the condo or co-op board (with the rest of the board package) for final approval. Once you have board approval a closing date could be set up. So, just because you have a signed contract doesn't mean the deal is done; you still have the loan and the board approval to take care of!
~ The Finance Contingency
~ Is Your Earnest Money Protected By The Finance Contingency
Comments (5)
Clarification of the term "secure a loan" in your post. The mortgage contingency clause does not use these terms. It usually states that a buyer can withdraw from the contract and get his deposit back if he cannot obtain a "commitment letter". A commitment letter may contain "conditions" which if not satisfied will result in the buyer not getting the loan. So it is possible to satisy the mortgage contingency clause (ie. get a commitment letter ) and not secure the loan (ie not get the loan because you did not satisfy the conditions) and lose your deposit.
Posted by 3 cents | March 2, 2006 2:00 AM
I'm not sure about this one 3 cents...(thanks for the comment by the way after our chats on raincityguide)...I was under the impression that the conditions that are laid out in the pre-approval letter must be satisfied in order to get a loan committment letter. Once you get a loan commitment letter, which basically means the bank is committing to the loan, I thought the loan is secured and a closing date just needs to organized once board approval is given. How can you get a loan commitment letter and then get 'rejected' by the bank before the deal closes?
What conditions or circumstance occurs to make this happen? I dont know, Im asking?
I'm going to see if I can get a real estate attorney to review this and clear it up as I very well could be wrong on this one point.
Posted by UrbanDigs | March 2, 2006 1:59 PM
3 Cents is correct.
First of all, there really isn't a "No Financing Contingency Clause." When a buyer agrees that there will be no financing contingency, the financing contingency clause that is already in most contracts is simply omitted. There is not usually a "No Financing Contingency" clause, just the ommission of such a contingency. Occassionally, a developer will put a clause in his contract for the purchase of a newely built property that reconfirms that there is no financing contingency.
All mortgage commitments have conditions attached to them that need to be satisfied prior to closing. The conditions range from an appraisal of the apartment, to the approval by the bank of the co-op or condominium, to something that needs explanation by the borrower. Also, if a mortgage commitment letter is issued by the bank, but the borrower's financial condition takes a turn for the worse after the commitment is issued, but before closing, the bank may withdraw the commitment (i.e. if the borrower lost his/her job prior to closing). In this event, a buyer who has signed a non-contingent contract is in jeopardy of not being able to close and losing his/her contract deposit.
Posted by Peter Graubard | March 2, 2006 3:42 PM
Peter,
Thank you very much for clarifying this point!
Noah
Posted by UrbanDigs | March 2, 2006 3:59 PM
You can see the appeal of doing this by the seller. But in today's market where the dynamic or power has shifted closer to buyers, seller's should find it very difficult to get a contract signed with this clause in it. Talk to your real estate attorney about this and be sure to find out if your contract of sale has this clause in it before you sign; especially if you have bad credit, are self-employed, or have reported declining income on your tax returns from successive years. These are all items that a bank will look at before committing to your loan!
Posted by mbt | August 12, 2010 3:14 AM