Financing vs. Funding Contingency in NYC Real Estate: Whats the Difference?

Nick at Hauseit (https://www.hauseit.com) explains the difference between financing and funding contingencies in NYC real estate.

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So, what's the difference between a financing or a mortgage contingency and a funding contingency? Most buyers in New York City are unfamiliar with the distinction between the two. Now let's do a quick refresher on the concept of a mortgage contingency.

A mortgage contingency essentially gives a buyer the ability to back out of a transaction and recoup their deposit in the event that they're unable to obtain financing from an institutional lender within a certain period of time after signing the contract. While New York City is awash with cash offers, the reality is that most people still do finance. As a result, your typical first time buyer in New York City will almost always have a mortgage contingency.

Now here's where it gets more complicated. What actually appears in the contract as far as the language surrounding the contingency does vary by transaction based on which contract template is used and based on the attorneys who are negotiating the contract. So, in other words, there is no sort of guaranteed standard language that would essentially signify a mortgage contingency in a transaction, but most of the time your typical mortgage contingency in New York City will have a specific loan amount written into the contract and if the commitment letter comes back for a loan size which is less than the loan amount in the contract, then the buyer technically has the right to back out.

Now one common way this happens particularly for hot listings in areas like park slope for example, is if the appraisal comes in low. If the appraisal comes in below the contract price the bank will only be able to lend based on the contract price. So, if the bank was going to do an 80% LTV mortgage, the 80% LTV is now on the appraised value as opposed to the contract price.

As a result, the commitment letter will have a loan size which is smaller than the commitment amount listed in the contract. As a result, under a typical mortgage contingency, the buyer is allowed to back out. However, in many cases particularly for hot listings, the low appraisal is oftentimes removed as an acceptable trigger for the mortgage contingency itself.

In other words, if the appraisal comes in low, the buyer will not be allowed to walk away. The buyer will simply have to come to the closing table with additional monies to make up the differential between the actual commitment letter loan size and the loan size listed in the contract. But, regardless of how the mortgage contingency is structured and written into the contract, the mortgage contingency only provides a buyer with protection up until the point that a commitment letter, an acceptable commitment letter under the language in the contingency in the contract is furnished to the buyer by the institutional lender.

Once the commitment letter is delivered technically, the mortgage contingency is satisfied and the buyer's protection goes away. In other words, a typical mortgage contingency does not cover the buyer between the periods of receiving that commitment letter and the time when the lender actually funds the loan at closing. Now this period is often called or referred to as gap risk. There is legitimate risk that if the lender for whatever reason retracts that commitment or just doesn't fund the loan, the buyer technically would be in default if they didn't come up with the full purchase proceeds at the closing and this is where the concept of a funding contingency comes into play.

Now with a funding contingency, it protects against this gap risk by essentially protecting the buyer's earnest money deposit during this period between the original mortgage contingency having been satisfied and the date of the closing when the lender funds the loan.
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https://www.hauseit.com

Save money when buying, selling and renting real estate in New York and Florida with Hauseit (https://hauseit.com). Available in NYC, Long Island, the Hudson Valley and South Florida. Est 2014.

Hauseit Group LLC, Licensed Real Estate Corporation
Tel: (888) 494-8258 | https://www.hauseit.com
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