Don’t sign contract without financing contingency

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Lawyers start with a boiler-plate contracts, but the terms they add provide essential protections.

Lawyers start with boiler-plate contracts, and the terms that they add are intended to provide essential protections.

In this nascent world of restrictive credit standards, anyone buying a new home needs to expect the expected.

When it comes not only to getting mortgage approval but also to getting promised funds, buyers can count on roadblocks that could delay or even prevent settlement.

That is why it is essential for their attorneys to include appropriate financing contingency clauses in the contracts.  Those clauses allow buyers to have their deposits returned in the event that lenders don’t finally provide the money to close.

Considering that the usual deposit of 10 percent of the purchase price — $40,000 on just the $400,000 purchase of a studio apartment — is a substantial sum, contingency clauses are not to be taken lightly.

Notes Forest Hills lawyer Ryan J. Walsh, whose explanation I’ll paraphrase liberally below, there are three major contingencies that can protect a buyer:

  1. Mortgage
  2. Funding
  3. Building

Contracts require a mortgage commitment within a limited time period, often extended.  What a commitment specifies is a satisfactory appraisal by the bank.  It if it is not satisfactory, there will be no loan.  But at least a mortgage contingency allows purchasers to get their deposits back.

A funding contingency is protection against a lender’s refusal or failure to provide the mortgage money for any reason not related to the purchaser’s bad faith.

As you might imagine, sellers are not fans of the funding contingency — well, not any contingency for that matter — but those who cannot stomach a funding clause may well permit a building contingency.

Such a contingency is the loophole that permits the buyer to cancel the contract without penalty should the lender deny funding because of issues related to the building such as code violations, taxes or insurance.

The best attorney for you will be knowledgeable about contingencies and other contract terms peculiar to Manhattan, capable of firm negotiations and disposed to give you clear advice.  In fact, picking the right one may prove to be even more important than selecting your next home.

Whether Uncle Fred, neighbor Sophie and Upstate Aaron should be involved in such a fraught transaction is questionable.  Avuncular, considerate or cut-rate just won’t cut it when it comes to being well qualified for your transaction.

So, choose wisely.  Please.  And don’t neglect those contingencies.

Monday: Out and About

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201
Web site

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