Mortgage Contingency Clauses: What They Are & How They Work

A mortgage contingency clause is a provision in a real estate contract that makes the contract contingent upon the buyer being able to obtain a mortgage loan. If the buyer is unable to obtain a mortgage, they have the right to cancel the contract and receive a refund of their deposit.

Mortgage contingency clauses are common in New York real estate contracts. They are designed to protect both the buyer and the seller. For the buyer, the clause protects them from being financially obligated to purchase a property that they cannot afford. For the seller, the clause protects them from having to sell their property to someone who may not be able to complete the sale.

There are a few different ways that mortgage contingency clauses can be structured. The most common type of clause is a "passive" clause. With a passive clause, the buyer has a certain amount of time to obtain a mortgage. If they are unable to obtain a mortgage within that time frame, they can cancel the contract and receive a refund of their deposit.

Another type of mortgage contingency clause is an "active" clause. With an active clause, the buyer must take specific steps to obtain a mortgage. For example, they may need to submit a pre-approval letter from a lender. If they are unable to obtain a mortgage, they can cancel the contract and receive a refund of their deposit.

The specific terms of a mortgage contingency clause will vary depending on the specific contract. However, all mortgage contingency clauses should include the following information:

• The amount of time that the buyer has to obtain a mortgage

• The type of mortgage that the buyer must obtain

• The consequences of the buyer being unable to obtain a mortgage

It is important to read the mortgage contingency clause carefully before signing the real estate contract. If you have any questions about the clause, you should consult with an attorney.

Here are some of the benefits of using a mortgage contingency clause:

• It protects the buyer from being financially obligated to purchase a property that they cannot afford.

• It protects the seller from having to sell their property to someone who may not be able to complete the sale.

• It gives the buyer peace of mind knowing that they have a way out of the contract if they are unable to obtain a mortgage.

Here are some of the drawbacks of using a mortgage contingency clause:

• The seller may have to re-list the property if the buyer cancels the contract.

• The buyer may miss out on a good deal if they are unable to obtain a mortgage in time.

Overall, mortgage contingency clauses can be a useful tool for both buyers and sellers in New York real estate transactions. However, it is important to understand the risks and benefits of using a clause before signing the contract. Call or email The Donaldson Law Firm, PLLC and let us help you navigate the selling and buying process.