Risk factors to consider when waiving a mortgage contingency

by Frank Coffey

Signing a real estate contract that does not have a mortgage financing contingency is never an easy proposition for any purchaser who needs the financing to complete the purchase.  In competitive real estate markets, it is common for sellers to request non-cash purchasers to waive the mortgage financing contingency and in many instances, waiving the mortgage financing contingency might have been the only way the purchaser’s offer was considered or accepted in the first place.

However, the transaction can be one where a buyer needs financing to complete the purchase, but the purchaser is willing to take on the added risks of that decision.  In New York, the main risk of waiving the mortgage financing contingency is if you are not able to secure a mortgage you could end up losing your contract deposit which is typically 10% of the purchase price.

In these situations, particularly in the COVID-19 environment, purchasers need to carefully consider the added risks of their own employment and financial situations and consider the possibility of ultimately not being able to obtain mortgage financing.  COVID-19 has presented significant challenges to residential mortgage lending and many lenders are finding it difficult to measure near-term credit conditions and portfolio health. 

It is also important to consider other factors that may contribute to the inability to secure mortgage financing such as the amount of pre-sales that lenders will look at in new development condominium projects or the inadequacy of the financials of a condominium or cooperative building.  These risks can be mitigated by working with lenders who are familiar with the particular project and lenders who have flexible underwriting guidelines. For new developments, the risk on pre-sales numbers can be mitigated by working with the sponsor’s preferred lenders

Be sure to weigh up the pros and cons of your particular situation and always confer with your mortgage banker, real estate agent and your real estate attorney before committing yourself to a particular transaction. 

Thanks, and good luck!