The Pitfalls of a Financing Contingency in a Hot Market



The New York City real estate market is heating up, and financing contingencies are becoming less common.  According to Jerry Feeney, Residential Real Estate Attorney in Manhattan, there are some common mistakes that could put buyers or sellers in a compromised position.

Loan to Value Ratio is too low:  Sometimes in the negotiation, a seller will agree to provide a financing contingency only if the buyer pays a larger down payment, decreasing the maximum loan to value (LTV) that the buyer is permitted under the contingency language.  But that’s not always the smart move.  Typically, the lower the LTV, the better chance the buyer has to qualify for the loan.  But forcing the LTV too low could give the buyer a way out of the contract.

For example, the buyer is pre-qualified for 80% of the value of the apartment.  The bank has checked his credit, history, and reserves and is confident that he will be approved.  But if the LTV is 70% which may make it more likely he could get the loan, but in reality causes his reserves to drop that could get him rejected.  The buyer has an option to terminate the deal at the end of the contingency period and get his down payment back.

Appraisal Issues:  The typical financing contingency implies that the property will appraise at the full contract value.   However in the recovering market, appraisals often don’t keep up.  Bidding wars  escalate prices and the most recent comparables will not support them.    The Seller’s counsel should advise them to include an “appraisal window” which holds the buyer to the contract notwithstanding a low appraisal.

Signing the Non-Conforming Commitment:   A commitment letter conditioned on the appraisal does not satisfy the contingency language until the appraisal is completed at full value, and accepted by the bank.  But beware; the standard form condominium contract waives this language if the buyer accepts the non-conforming commitment letter (by accidentally signing it)!  Make sure your lawyer reviews all documents before you sign it.


Excerpted from Jerry’s Legal Tips by Jerry M Feeney Esq.


is post is provided as informational proposes only and should not be construed as legal, accounting or tax advice by the RealEstateGeezer. You should seek advice from a qualified professional.

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