In Buyer’s Market, Take Advantage of Contingency Clauses in Your Mortgage Contract

With such a high level of inventory across the nation, buyers have a lot of leverage. In almost every housing market, sellers are being forced to drop asking prices and give in to the demand of potential owners.

You should take advantage of this fact.

One way to do so is to ask for contingency clauses in your home mortgage loan contract.

For example, you can request that the residence must pass an inspection. If the inspection turns up too many problems, the buyer can ask the seller to correct them. If the seller refuses, the buyer may withdraw without penalty.

Another fixed-rate mortgage contract clause may make the sale contingent on obtaining financing. Typically, it’s best to line up a mortgage before making an offer - but many people wait until they’re ready to buy before they put their financing in place. If they fail to obtain a mortgage, they can now get their down payment back.

“A year ago,” says New York City real estate attorney, Neil Garfinkel, “you couldn’t get any contingencies written into a contract. They are now finding their way back in.”

“Demand was so high,” says Marilyn Hottle, a mortgage lender with Coldwell Banker Camelot in Mt. Dora, Florida, “that even appraisals didn’t seem to matter. The appraisal would come in at much less than the selling price and the buyer would take it anyway.”

However, there’s a limit, even in these slower times, to what contingencies most sellers are willing to accept. Most sellers will still not make the sale of their property contingent on the sale of the buyer’s home, according to Garfinkel and CNN.
That can be a very onerous clause, tying up the seller’s property for weeks, with no financial benefit if the buyer opts out.

During slow markets, however, buyers may not want to commit to a deal without being able to sell their old house first, if it means losing their earnest money. That can account for as much as 10 percent of the home’s purchase price.

Sell then buy: There is an alternative - the 72-hour contingency. It gives a little bit to both parties.

Here’s how it works: The seller continues to market the house even after a home loan contract is signed. If it attracts another offer, the original buyer has 72 hours to decide whether to go through with the sale - and try to sell the old house afterwards - or drop out, getting the earnest money back.

For sellers, the 72-hour contingency means the sale will be more likely to go through speedily, either to the first buyer or to a later one. In effect, such a clause doesn’t remove the property from the market.

How common the 72-hour clause has become depends on local conditions. Says Mary White, a home mortgage broker in Great Barrington, Massachusetts: “The only time we do a 72 hour is when someone really must sell their home first.”

Hottle says they’re increasing only minimally in her territory near the Orlando housing market, even though, she says, “They can be in the interest of both parties.”

She says they only tend to occur during real buyer’s markets. Even in a balanced market, she says, “Sellers are reluctant to offer this kind of contingency.”