Buying Q: how to de-risk gap between mortgage commitment letter and closing?
(1) My understanding is that the language in the contract stating a closing date “on or about” means that you can close up to 30 days after (or before) the agreed upon closing date. While this alone doesn’t protect you from risk, it means there is a normal expectation of the possibility of closing after the closing date.
(2) Our lawyer requested an extension of our funding contingency to cover this gap between commitment letter and closing date. The bank was taking extra extra time (holidays, etc.) and our lawyer wanted to protect us from exactly this problem with the gap. Your RE attorney should be able to apply for this extension, and presuming that it’s all delays due to normal bureaucracy, I am sure the sellers would be happy to provide the extension because it means they can avoid having to start all over in the selling process with a new buyer.
Good luck!
bbrc
in General Discussion 5 years and 7 months ago
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true | 5 years and 7 months ago
About to go into contract on our first property (2-family) and am realizing that there’s quite a risky part of the closing timeline. I’m wondering if there’s any ways for us to mitigate this risk. Here’s my understanding of how things work:
– Sign contract and put down 10% deposit.
– 45 days for us to secure a commitment letter from lender. If we don’t, we can walk away and get our down payment back (this is called a financing contingency).
– 15 additional days (60 days total) until official closing. During this time the bank can still walk away from their commitment, but we are no longer under the financing contingency. Example hellish scenarios are we lose our jobs or one of us dies during the 15 days and the bank no longer is willing to commit to the loan. In this unfortunate scenario, we can a) ask for a 30 day extension and try to find financing somewhere else or b) lose our down payment.
We haven’t signed the contract yet and I have some time booked with my attorney tomorrow to discuss details. But, I wanted to see if the Brownstoner community had any tips for n avigating this. It seems like there’s a very low chance anything will happen during those 15 days, but if something does happen it would be a very painful loss.
brokelin | 5 years and 7 months ago
The risk is real – it really feels like taking a leap of faith that everything will work out OK.
The risk of the death of one of you is the easiest risk to cover – you can easily do that by buying lots and lots of life insurance.
The risk of losing a job is one you can’t really ever cover if you are an employee-at-will, as most of us are (except those who have tenure or contracts). Even if your income is independent of an employer, the self-employed also get injured or sick and can’t work, and are less likely to have good disability insurance.
You could possibly get out of your contract if you lose a job (and you would be smart to want to, unless you are quite sure you could get another job to replace your income quickly) by telling your bank that you lost it and losing your mortgage commitment. When my year-end bonus turned out to be not what I expected in the midst of my purchase, which was the first signal of my employer’s financial difficulty, making me think it was time to think about changing jobs, I asked my attorney if I could get out of the contract at tha t point if I decided not to go through with the purchase, as I was worried about my job’s stability – she told me there was always a way to get out of the contract. Whether I could have gotten my 10% deposit back, without the seller just wanting to give it back, is not something I can remember (though it would have certainly been at risk.)
I decided to go through with the purchase, and started interviewing for new jobs right after closing, and took a new job a few months later. It has been years, so I don’t remember my attorney’s exact reasoning – it may have had something to do with the inspection I had of the building (though that was because I wanted one, not that there was any inspection contingency or expectation that they woud fix anything for me based on the inspection), or perhaps it was something else she would have used to get me out of the contract (it was not my bonus, as that would not have affected my mortgage commitment at all, as I took a mortgage that was much less that I could have taken just on my base salary alone.) Your questions are ones you should ask your attorney – your attorney’s answers might give you some comfort about the risk, or at least a better understanding of your options should something unlikely occur.
I don’t want to freak you out more, but another risk in the situation that is much more likely to occur (and did when I bought my coop) is that you may not be ready to close by the deadline (in my case, due to the coop board having to make a decision, which they did quite quickly, but then bank having to be ready to close – it was year end, and though I wanted to close in December after I got the board approval, which was weeks before year end, the bank just couldn’t schedule it until the new year – I was told that those who “had” to close by year end, presumably for tax reasons (that I didn’t have) took priority. So, my seller had to extend the time for closing for me multiple times (at first, because the bank took forever with many delays to do the underwriting, not because of anything to do with me but because they were inundated with loan applications, so much that they had to hire more peple to do their loan underwriting), and then later to schedule the closing. As I read the contract, the seller could have cancelled the contract at any time after we hit the first closing deadline, rather than extend the due date yet again, if they felt like it – say, if they got a better offer, or an all-cash offer. They didn’t – some people know that closings often take longer than the deadlines in the standard contract, and expect that. Good luck to you.
slopefarm | 5 years and 7 months ago
talk to your attorney about the risk of not closing within the closing timeline. My understanding, though this is not my area, is that the seller can’t just default you on day 60. I think if they want to default you rather than work with you there is a process of declaring “time is of the essence” which then starts a clock. I’ve never heard of someone getting defaulted out of their down payment on day 61. But ask, since I don’t have sufficient knowledge about this to be sure.
daveinbedstuy | 5 years and 7 months ago
Also, the “day 60” deadline is one that, as the time gets closer, is always subject to moving around for a number of reasons.
angelique.m.west | 5 years and 7 months ago
Maybe you haven’t read your contract closely enough. Most standard property purchase contracts have a clause that says if the purchaser dies the deal is called off and the seller returns the deposit. Ditto if you lose your job because that likely means you can’t get financing. It is also very common that there are delays in closing. Usually, if you are close to missing the bank’s deadline they will re-up the commitment letter and give you an extension for a small fee. Of course, you have to ask and, if you have a good real estate lawyer, they are going to keep track of the timelines and alert you. By time you have a contract and put the deposit down and have a commitment letter all sides are going to generally work in good faith to make the deal happen.
true | 5 years and 7 months ago
Thanks all for your help/advice. @mat315 you’re right about the common out triggered by `death of either purchaser` – it’s part of most Purchaser Riders, including ours (and I missed that in my initial reading).
Unfortunately that’s not true re: the deal collapsing because of job loss post commitment letter. There IS a gap between the Financing Contingency and Close that’s risky and our attorney shared many purchasers in NYC simply accept that risk.
I’ve read (all hearsay though) that banks’ commitment letter used to be much firmer with little to no conditions. Now, banks are more cautious and their commitment letters often have several loopholes allowing them to walk away. Our attorney suggested trying to negotiate more leniency into the rider now with a Funding Contingency on top of the Mortgage Contingency (read more here for basics: https://www.brickunderground.com/agent-referral/mortgage-contingency-vs-funding-contingency).
I’ve also worked very closely with my bank to ensure that the commitment letter is as condition free as possible and issued as soon as possib le.
I’m ALSO being extra nice to my boss, haha.
IDK anything at all about the insurance industry, but this might be a nice opportunity for an insurance company – I’d pay for it.
true | 5 years and 7 months ago
Also, (hopefully this helps those in similar situations moving forward) we’ve learned that it’s definitely possible for us to request an extension if something comes up around closing. The Seller then can either a) grant the extension or b) return our deposit to us and we all move on. We do not default. NEVERTHELESS, the risky gap between the Mortgage Contingency deadline and Closing (whatever day that ends up being) remains. It’s very important that you and your attorney stay on top of the timeline.
true | 5 years and 7 months ago
Link to basic, high-level info on Funding Contingency vs Mortgage Contingency (link above is broken): https://www.brickunderground.com/agent-referral/mortgage-contingency-vs-funding-contingency