What is a Mortgage Contingency Clause in a Real Estate Contract?

Understanding Mortgage Contingency in Real Estate Transactions

When buying or selling a house or apartment, the term “Mortgage Contingency” frequently comes up. Let’s spend a few minutes discussing what this means. But first, we need a little bit of background information.

The Contract of Sale

When a buyer and seller of a particular property have reached a deal, the buyer and seller enter into a Contract of Sale. When this contract is signed and the buyer pays the down payment to the seller’s attorney, the transaction moves forward. The Contract of Sale is usually several pages, and often times has another document called a “Rider” with additional provisions attached to it. There are many provisions in the contract which detail all the aspects of the particular transaction.

Of the many provisions in the Contract of Sale, there are two very important provisions. The first, most important provision of the Contract of Sale is the purchase price. This is usually found somewhere on the first page. The purchase price is the amount of money the buyer has to pay to the seller to buy the property. The purchase price must be verified by both parties to the Contract of Sale, particularly if there were negotiations going back and forth, a bidding war among several purchasers or other circumstances. In addition to the purchase price on the Contract of Sale, the amount of the down payment must be stated and the amount due to the seller at closing.

The Mortgage Process

Many buyers must take out a loan in order to pay the seller the purchase price that they agreed upon. Getting a loan is a complicated process with many steps. A well prepared buyer will start the mortgage process long before they pick a property to buy and submit an offer to the seller. A buyer can work with a bank directly (such as Chase, or Citibank) or work with a licensed mortgage broker who has relationships with lending institutions. Since the mortgage process can be long and tedious, it is critical for the buyer to cooperate and respond to all the demands of the bank or lending institution.

The Mortgage Contingency Clause

The mortgage contingency clause in a Contract of Sale protects the buyer who relies on getting a mortgage to buy the property. In the event that the buyer is not able to get a mortgage, the buyer is not obligated to complete the sale. There are restrictions to this however, and the reason that the buyer can’t obtain the mortgage must be due to factors that are not the buyer’s fault. An example of this is when the buyer can’t qualify for a mortgage because the buyer lost his job through no fault of his own. If the buyer can’t qualify for a mortgage because he quit his job, then the buyer is not protected by the mortgage contingency clause.

The reason the Mortgage Contingency clause is so important is that if the buyer can’t go through with the purchase because the buyer is not able to get a loan, the seller must return the down payment to the buyer and both parties cancel the deal.

Without a Mortgage Contingency clause, the buyer is obligated to go forward with the purchase even if the buyer is unable to obtain a loan. If the buyer cancels the deal because the buyer can’t get a loan, then the buyer forfeits or loses the down payment.

The down payment is usually between 5 and 20% of the purchase price, which is a large sum of money. The best way for a buyer to protect their down payment is to ensure the Contract of Sale has a Mortgage Contingency Clause.

Sample Mortgage Contingency Clause Language

Here is sample language in a typical Mortgage Contingency Clause. Some variations can occur and not all provisions will apply:

Mortgage Commitment Contingency. (Delete paragraph if inapplicable. For explanation, see Notes on Mortgage Commitment Contingency Clause.) (a) The obligation of Purchaser to purchase under this contract is conditioned upon issuance, on or before ___________________ days after a fully executed copy of this contract is given to Purchaser or Purchaser’s attorney in the manner set forth in paragraph 25 or subparagraph 8(j) (the “Commitment Date”), of a written commitment from an Institutional Lender pursuant to which such Institutional Lender agrees to make a first mortgage loan, other than a VA, FHA or other governmentally insured loan, to Purchaser, at Purchaser’s sole cost and expense, of $____________ for a term of at least _______ years (or such lesser sum or shorter term as Purchaser shall be willing to accept) at the prevailing fixed or adjustable rate of interest and on other customary commitment terms (the “Commitment”). To the extent a Commitment is conditioned on the sale of Purchaser’s current home, payment of any outstanding debt, no material adverse change in Purchaser’s financial condition or any other customary conditions, Purchaser accepts the risk that such conditions may not be met; however, a commitment conditioned on the Institutional Lender’s approval of an appraisal shall not be deemed a “Commitment” hereunder until an appraisal is approved (and if that does not occur before the Commitment Date, Purchaser may cancel under subparagraph 8(e) unless the Commitment Date is extended). Purchaser’s obligations hereunder are conditioned only on issuance of a Commitment. Once a Commitment is issued, Purchaser is bound under this contract even if the lender fails or refuses to fund the loan for any reason.

(b) Purchaser shall (i) make prompt application to one or, at Purchaser’s election, more than one Institutional Lender for such mortgage loan, (ii) furnish accurate and complete information regarding Purchaser and members of Purchaser’s family, as required, (iii) pay all fees, points and charges required in connection with such application and loan, (iv) pursue such application with diligence, and (v) cooperate in good faith with such Institutional Lender(s) to obtain a Commitment. Purchaser shall accept a Commitment meeting the terms set forth in subparagraph 8(a) and shall comply with all requirements of such Commitment (or any other commitment accepted by Purchaser). Purchaser shall furnish Seller with a copy of the Commitment promptly after receipt thereof.

(c) (Delete this subparagraph if inapplicable) Prompt submission by Purchaser of an application to a mortgage broker registered pursuant to Article 12-D of the New York Banking Law (“Mortgage Broker”) shall constitute full compliance with the terms and conditions set forth in subparagraph 8(b)(i), provided that such Mortgage Broker promptly submits such application to such Institutional Lender(s). Purchaser shall cooperate in good faith with such Mortgage Broker to obtain a Commitment from such Institutional Lender(s).

(d) If all Institutional Lenders to whom applications were made deny such applications in writing prior to the Commitment Date, Purchaser may cancel this contract by giving Notice thereof to Seller, with a copy of such denials, provided that Purchaser has complied with all its obligations under this paragraph 8.

(e) If no Commitment is issued by an Institutional Lender on or before the Commitment Date, then, unless Purchaser has accepted a written commitment from an Institutional Lender that does not conform to the terms set forth in subparagraph 8(a), Purchaser may cancel this contract by giving Notice to Seller within 5 business days after the Commitment Date, provided that such Notice includes the name and address of the Institutional Lender(s) to whom application was made and that Purchaser has complied with all its obligations under this paragraph 8.

(f) If this contract is canceled by Purchaser pursuant to subparagraphs 8(d) or (e), neither party shall thereafter have any further rights against, or obligations or liabilities to, the other by reason of this contract, except that the Downpayment shall be promptly refunded to Purchaser and except as set forth in paragraph 27.

(g) If Purchaser fails to give timely Notice of cancellation or if Purchaser accepts a written commitment from an Institutional Lender that does not conform to the terms set forth in subparagraph 8(a), then Purchaser shall be deemed to have waived Purchaser’s right to cancel this contract and to receive a refund of the Downpayment by reason of the contingency contained in this paragraph 8.

(h) If Seller has not received a copy of a commitment from an Institutional Lender accepted by Purchaser by the Commitment Date, Seller may cancel this contract by giving Notice to Purchaser within 5 business days after the Commitment Date, which cancellation shall become effective unless Purchaser delivers a copy of such commitment to Seller within 10 business days after the Commitment Date. After such cancellation neither party shall have any further rights against, or obligations or liabilities to, the other by reason of this contract, except that the Downpayment shall be promptly refunded to Purchaser (provided Purchaser has complied with all its obligations under this paragraph 8) and except as set forth in paragraph 27.

(i) For purposes of this contract, the term “Institutional Lender” shall mean any bank, savings bank, private banker, trust company, savings and loan association, credit union or similar banking institution whether organized under the laws of this state, the United States or any other state; foreign banking corporation licensed by the Superintendent of Banks of New York or regulated by the Comptroller of the Currency to transact business in New York State; insurance company duly organized or licensed to do business in New York State; mortgage banker licensed pursuant to Article 12-D of the Banking Law; and any instrumentality created by the United States or any state with the power to make mortgage loans.

Seeking Legal Guidance

The attorneys at Spodek Law Group P.C. have over 36 years of experience handling real estate closings. We have represented both buyers and sellers of residential houses and apartments throughout New York. We will guide you through the process of your residential purchase or sale, and will walk you through each provision of the Contract of Sale.

As attorneys, we will negotiate for a Mortgage Contingency Clause when we represent a buyer. In today’s market, some sellers will refuse to accept a Mortgage Contingency, and will select a buyer who is able to pay cash or is willing to risk their down payment if they can’t get a loan. When we represent a buyer we will discuss all of the risks and benefits of entering into a Contract of Sale and each of its provisions.

When we represent a seller, we will advise them as to how the Mortgage Contingency Clause will affect them and what options are available to them. The circumstances surrounding each transaction are unique and require a careful analysis.

Spodek Law Group P.C. is available to answer any of your real estate questions, and will gladly work with you through each step of the process.