When bidding on a property in New York City, you’ll often find yourself up against all-cash buyers or buyers who are willing to waive their mortgage contingency. Those buyers are attractive to sellers because there is one less hurdle to overcome – they do not need to navigate their way through the treacherous mortgage application process.
A mortgage contingency offers protection to a buyer. If a buyer with a mortgage contingency is declined for a mortgage for any reason, it allows that buyer to void their purchase & sale agreement and be reimbursed the earnest money deposit that is typically provided upon execution of the agreement.
So, when is it safe to waive your mortgage contingency?
- It’s safe when you are paying all cash.
- It’s safe when you are applying for a mortgage but have the means and the willingness to pay all cash in the event you are declined for a mortgage.
But what happens when you are in a heated competition for a property and you’re up against other buyers that don’t need a mortgage and you’re not in position to pay cash? Is there a safe enough scenario to waive your mortgage contingency?
Most buyers who finance the property they eventually purchase begin their search by obtaining a pre-approval or pre-qualification letter from a mortgage lender. Typically, that letter is issued by a loan officer or mortgage broker who likely obtained a credit report and reviewed a client’s income and asset situation. The pre-approval letter is based on that loan officer/mortgage broker’s experience. It’s very important to note that loan officers and mortgage brokers almost never have the authority to actually approve a mortgage application. That authority is given to an underwriter – the final decision maker.
When an underwriter reviews an application and all of the supporting documentation that is provided, they can issue a mortgage commitment. A pre-qualification letter is a non-binding document. But when a commitment letter is issued a lender is committed to offering a loan, as long as the conditions listed on the document are met. (Definitely take a close look at the conditions to make sure they’re not extremely open-ended or even impossible to adhere to).
Typically, a mortgage application does not make its way to an underwriter until a buyer is in contract to purchase a property. But there are dozens of lenders that allow for the submission of “TBD” applications. In other words, a buyer can submit an official mortgage application at the outset of their search when a property address is still “To Be Determined.”
The loan officer would have to fill in a few blanks – like property type, purchase price, taxes/common charges, or monthly maintenance. It’s important that those variables are filled with numbers that are very likely to be accurate. In fact, its safest to submit a TBD application using numbers that are higher than the applicants likely target numbers will end up. (If someone receives a commitment for a $3 Million loan with a $4,000 monthly maintenance fee, certainly they’ll qualify for a $2.5 Million property with a $3,000 monthly maintenance fee).
A buyer armed with a commitment letter is in a much stronger position than a buyer who’s carrying around a pre-qualification letter. A seller and their broker would certainly feel better about accepting an offer from someone whose information has already been reviewed by an underwriter. And, perhaps even more importantly, having a commitment letter provides a buyer with much needed peace of mind because they’ve already been through the tough part of the mortgage process.
In theory, having a solid mortgage commitment in hand is reason enough to waive your mortgage contingency. After all, that contingency protects you against being declined for a mortgage and you’ve already been approved. That said, if a seller won’t accept any offers that include a mortgage contingency, show your commitment to your attorney and discuss the risks before making a final decision.