Mortgage Contingency FAQs
Thursday, January 27, 2022
When financing a purchase transaction, the mortgage contingency date is the single most important pre-closing event after the Purchase and Sale Agreement (P&S) is signed. The mortgage contingency date typically occurrs three to four weeks afer the P&S execution. The lender needs to issue a "clean" mortgage commitment letter on or before the mortgage contingency date, or the buyer's attorney likely will seek an extension.
What Is The Purpose Of A Mortgage Commitment?
When financing a loan, a lender undertakes a lengthy review of the borrower and subject property prior to approving financing. The borrower and the property must meet detailed federal lending guidelines. Thus, a mortgage contingency date allows a Purchase and Sale Agreement to be signed before a borrower is approved.
What If A Borrower Is Not Approved?
If a borrower's financing is not approved, then the lender must issue a "denial" letter and the buyer's attorney must submit a termination letter to the seller. Provided the request is timely, the borrower will receive a full refund of the P&S deposit (typically 5% of the purchase price in Massachusetts). However, a skilled loan officer should be able to make an early determination that a borrower is qualified for a loan. Moreover, the overall process creates incentives to ensure that the borrower is qualified: the seller, lender, agents and the closing attorney all will have invested resources into a transaction and thus want to avoid a scenario where the deal is terminated several weeks in.
What Does A Lender's Underwriter Review?
A lender's underwriter engages in a thorough review of the borrower's ability to repay a loan, including reviewing credit, employment, and assets. (Note, if a borrower has commission or bonus based income, it may take longer to analyze).
The lender also reviews the appraisal to ensure the property appraises at or above the purchase price. Finally, if the borrower is purchasing a condominium unit, the lender conducts a detailed condominium project review. The review including ensuring the condominium questionnaire, the condominium documents and financials meet federal lending guidelines.
What If The Lender Does Not Have A (Clean) Commitment Ready On The Mortgage Contingency Date?
On occasion, a commitment can be delayed due to an issue beyond a lender's control such as problems with the appraisal process. The appraisl is conducted by an independent third party, and the lender does not have direct control over the scheduling or timeline. There also are occasionally issues with obtaining and reviewing financials (e.g., bank statements, brokerage accounts, tax returns). In either scenario, the buyer's attorney will request an extension. A seller is incentivized to grant an extension because if the seller refuses to extend, they must refund the buyer's full deposit and then put the property back on the market. Thus, the buyer typically can obtain one to two extension(s). However, many deals are on tight timelines, and if a seller is purchasing, they need the certainty of the commitment in a timely manner.
Practice Tip: Most lenders will issue a mortgage commitment in advance of the mortgage contingency date. Unless and until a commitment letter contains appraisal approval and (if a condominium unit) condominium project approval, the borrower should continue to extend the mortgage contingency date.
How Should A Borrower Read A Mortgage Commitment?
Once the lender issues the mortgage commitment, it is important for the borrower to thoroughly review the letter with their loan officer and/or attorney. The commitment will contain a few outstanding conditions. Most are boilerplate that apply to all loans and are easily satisfied in the days prior to closing. They include verification of employment, a final credit check, a final inspection (if new construction), or final review of bank statements.
Conditions that should be "red-flagged" as requiring an additional extension of the mortgage contingency date in order to satisfy underwriting guidelines include when a loan is "subject to" an outstanding appraisal condition, a loss of employment, or condominium project approval.
Should A Borrower Show The Commitment to the Listing Agent?
The lender sends the mortgage commitment directly to the borrower. A borrower is not required to disclose their mortgage commitment to any party in the transaction. Often, the commitment contains personal and private information, such as bank accounts, financials and employment. A borrower simply can let the mortgage commitment date pass when proceeding forward. Often, a buyer's agent will verbally notify a listing agent that the borrower has a mortgage commitment.