Good-bye, mortgage contingencies: tight inventory leads buyers to risk their down payments

So long, mortgage contingency. With lack of inventory creating conditions reminiscent of the real estate boom, many buyers are waiving the clause in a purchase contract that protects their down payment if they can’t get a mortgage.

But with banks skittish about home loans, that decision is much riskier than it was in the mid-2000s, brokers said.

These days, getting a mortgage is “always a risk until the bank comes to the table with the money,” said Tracy Makow, a partner with the Brooklyn-based law firm Brickner Makow. Still, “some people are willing to take it, because they want to buy the property. There’s very little inventory out there.”

Mortgage contingency clauses have been nearly universal in contracts signed since the financial crisis of 2008, brokers said. But in the face of a continuing inventory shortage, brokers told The Real Deal that some buyers are voluntarily waiving these clauses to help beat out other bidders. Others are acquiescing to demands by sellers, who don’t want their deal to collapse because a buyer can’t get a mortgage.

“No mortgage contingency is a great situation for the seller — it makes the deal a lot more solid,” said Howard Margolis, a broker at Douglas Elliman. “We’re seeing it a lot more over the past few months because of the tightening inventory.”

In the easy-credit days of the mid-2000s, it was common for homebuyers to skip mortgage contingencies. But that famously led to a flurry of lawsuits during the economic downturn, when buyers found they could no longer finance apartments they’d signed contracts to purchase, and sued developers to get their deposits back. Since then, mortgage contingences have been nearly ubiquitous.

But Margolis said that’s now changing. In recent months, he said at least half of all sales he’s seen have closed without mortgage contingencies.

“Because the lack of inventory is so severe, every viably priced property has got a line forming,” said Neil Binder, president of the Bellmarc Group. “The only way that you can entice sellers to agree to your terms over someone else’s is if you offer some kind of chocolate. And the only chocolate is if you don’t have the risk of a mortgage.”

Keith Burkhardt, founder of the buyers’ brokerage the Burkhardt Group, said he advises all his clients not to waive mortgage contingencies because the risk is just too great. Consequently, a number of his buyers have come up empty-handed.

Burkhardt said: “I’m being asked by many brokers straight away, ‘Are your buyers willing to go non-contingent? Because we have two or three other buyers that are not contingent on financing, and I just don’t see your deal happening.’”

In fact, with supply low and demand high, the terms of a sale — like no mortgage contingency — can become just as important as price, brokers said.

“One guy is offering $25,000 above the ask,” Margolis said, “but if the other person has a stronger ability to close, which is the better deal?”

And not every buyer is offering to waive the mortgage contingency. Many sellers are insisting that they do so — or no deal.

“It’s a seller’s market, and in a seller’s market, when they hold the cards, they want to make sure there’s no out for the buyer, so to strengthen their deal, they take away the financing contingency,” said Core CEO Shaun Osher.

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H.OM.E. Mortgage Bank’s Rolan Shnayder noted that high-end buyers are more likely to forgo financing contingencies, since they’re less likely to depend on a mortgage to get the deal done.

“Obviously, [this is more prevalent in] the upper echelon of the market, where a lot of those deals are done in cash anyway,” he said. In other price ranges, “I am still doing loans with plenty of buyers getting mortgage contingencies.”

For buyers in all price ranges, the decision to possibly lose their down payment — at least 10 percent of the price and, in many instances, 20 percent or more — should not be taken lightly, Makow said.

Binder warned that buyers who can’t pay cash or don’t have an airtight guarantee of a mortgage should not agree to a non-contingent deal.

“I wouldn’t do it unless I had certain assurances that I didn’t have a problem getting [a mortgage],” he said. “If I didn’t have the funds, I would never put myself at risk.”

Makow said most buyers who waive the mortgage contingency are fairly confident they have financing. But they can still get burned, she said, since banks today often refuse to finance certain buildings due to their financial health or compliance with Fannie Mae/Freddie Mac guidelines. Other times, the property is appraised too low.

At the very least, buyers should consult a mortgage banker or a real estate attorney before they relinquish their mortgage contingency, advised Shnayder, who is H.O.M.E.’s director of new development lending.

“You’re taking a gamble,” he said. “You should never do that without taking great care and reviewing your income assets with a professional mortgage loan officer to make sure that you’re not going to have an issue.”

To keep buyers from losing their deposits, some brokers have developed their own strategies for protecting their clients while still relinquishing the mortgage contingency clause.

Elliman’s Frances Katzen, for example, said she puts a funding contingency on the “back end” of some purchase contracts, so that the buyers only forfeit the deposit if the bank finds something wrong with the building or considers the appraisal too low, as opposed to the buyer’s personal qualifications.

But Makow said many sellers’ attorneys won’t allow the tweaking of mortgage contingencies.

“That’s very hard to do,” she said, “because you have to get the seller to agree. If I’m a seller’s attorney and it’s a non-contingent deal, there’s no back door.”

As unpleasant as losing a bidding war is, Burkhardt is adamant about his pro-mortgage contingency stance.

“It’s almost something that should potentially be legislated,” he said. “Buyers should have that protection. There’s just too much at risk.”