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What Waiving the Mortgage Contingency Really Means

By: Carter, Brian on in

In a seller’s market where multiple offers and bidding wars are frequent, much like we have been in for most of the last year, buyers will often seek ways to make their offers more competitive in hopes of having their offer accepted. Waiving the mortgage contingency is one common strategy, which has raised a lot of questions to PAR about the consequences of waiving this contingency.

The Agreement of Sale (Form ASR) designates various exit ramps from a transaction, most intended for buyers, with a few intended for sellers. Offers with fewer designated exit ramps for buyers can be viewed as stronger offers by sellers. When properly taken, these exit ramps generally result in the return of the deposit to the buyer. One example of a buyer’s exit ramp is the ability to terminate during the inspection contingency following receipt of an inspection report.

Another potential buyer exit ramp is the mortgage contingency. When elected, the mortgage contingency makes buyer’s obligation to settle dependent on obtaining mortgage financing. If mortgage financing does not come through by the settlement date, a buyer has a potential toll-free exit ramp from the transaction.

However, there appears to be significant confusion on the impact and consequences of a buyer waiving the mortgage contingency. Many agents and sellers wrongly believe that a buyer waiving the mortgage contingency means it is a cash deal.

Plainly stated, waiving the mortgage contingency has no effect on whether a buyer is allowed to obtain mortgage financing to complete the purchase. The waiver language in Paragraph 8 of the Agreement of Sale states that a “buyer may obtain mortgage financing and/or the parties may include an appraisal contingency.” A buyer waiving the mortgage contingency only closes buyer’s potential toll-free exit ramp from the transaction if mortgage financing does not come through by the settlement date.

Waiving the mortgage contingency also has no impact on whether a buyer can obtain an appraisal of the property. The mortgage contingency is found in paragraph 8 of the standard Agreement of Sale. Seller’s duty to cooperate with inspections, appraisals and the like is found in paragraph 12(A)(1). Nothing in paragraphs 8 nor 12 condition buyer’s ability to obtain an appraisal on whether the mortgage contingency is elected or waived.

The guidelines to the Agreement of Sale explain that waiving the mortgage contingency is appropriate when a buyer is proposing a cash transaction or when a buyer does not want the protections of the mortgage contingency. A note in the guidelines reiterate that even if waiving the mortgage contingency “a buyer may still be getting a mortgage and the seller would need to cooperate.”

At the end of the day, it is important to just read the Agreement of Sale without reading in, nor excluding, anything terms, duties or obligations onto the parties. When a buyer waives the mortgage contingency, the only impact is it closes a buyer’s potential right to exit the transaction if financing does not come through by the settlement date.

Read. The. Forms.

Each year the PAR Legal Hotline fields a fair number of calls with questions can be answered simply by taking the time to carefully read some of the most common transactional forms every so often.

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Agreement of Sale to be Updated July 1

Beginning July 1, all of the agreements should have the following elements to them, where applicable: fixtures and personal property, inspection limitations and reports and the Internet of Things and recordings.

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Comments (3)

Comments

  • Kathy Opperman   April 2, 2021 at 7:37 am

    It is important to mention that if the Buyer waives the mortgage contingency, the Seller will likely want to see proof of cash funds, or gift monies, before accepting the offer. Otherwise, a Seller has no assurance the Buyer has the ability to complete closing if their true intention is to get a mortgage and it fails for any reason. Our Sellers customarily require a Buyers Financial Statement with a bank/investment statement, gift letter with proof of funds, or letter from Buyer’s finance manager/bank when the mortgage is waived. Seller is limited to retaining deposit monies in the event of Buyer default, unless Buyer unchecks that box to make their “cash” offer stronger.

    Reply to Kathy Opperman
  • Jim Goldsmith   April 2, 2021 at 9:07 am

    Excellent article, Brian. As you note, waiving the mortgage contingency does not mean the buyer is an all cash buyer. When the contingency is waived, sellers and their agents should consider demanding that the buyer provide a BFI (Buyer Financial Information) to assure the financial viability of buyer to pay cash or get a mortgage. An offer sans mortgage contingency might seem good for seller, but if buyer is nevertheless seeking financing and can’t get it, the buyer may default. And if the deposit is low and serves as a liquidated damage, the seller is not going to be made whole and may turn her sights on her agent.

    Reply to Jim Goldsmith
  • Andrew Wetzel   April 2, 2021 at 11:27 am

    Thank you for the article. The topic creates some confusion! Assumption: if there is no mortgage contingency AND the buyer is going to use the inspection contingency as a ‘catch-all” allowing them to get an appraisal, I would conclude that they must adhere to the time frame of the contingency. Correct? Of course, absent receipt of a better offer or some circumstance causing the seller to wish the buyer would go away, listing agents and sellers want to close the sale. Hopefully both parties are committed to doing their part.

    Reply to Andrew Wetzel

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