Issues With Mortgage Contingency Clauses in Purchase and Sales Agreements

During the drafting and negotiation of the purchase and sale agreement concerning any real estate transaction in Massachusetts, it is important to understand how your mortgage contingency clause may come into play if you are trying to sell your current residence and purchase a new residence.  Often real estate lawyers in Massachusetts are requesting a provision that does not allow a purchaser of real estate to withdraw from a transaction without penalty if a mortgage commitment contains a condition that an existing residence be sold prior to the purchase.  The clause will often read as follows: "The BUYER understands and agrees that rejections for mortgage financing on the basis of the unsold status of his/her present home will not be a reason to terminate Agreement pursuant to the mortgage contingency."  This provision can create substantial issues for a purchaser as the deadline to close rapidly approaches. 

It may be that a lender will not issue at mortgage commitment due to the fact the buyers have not sold their present residence.  In this instance, under the terms of above clause, the buyers will not be able to terminate the agreement pursuant to the mortgage contingency under this scenario. It must be for an entirely different reason other than failure to sell a present residence.  

Although a lender may issue a mortgage commitment, it may contain a condition that the buyers must close the sale of their existing home prior to loan approval or consummation of the purchase of the new property.  This will create a timing issue with the transaction; now the buyers are acting in two different roles (as buyers and sellers), and relying on two separate lenders to finance two separate transactions.  This situation involves a high amount of stress on the homeowners as well as puts deposits at risk, and may involve a temporary move to a hotel until the completion of the purchase.  

To avoid the severity of this clause, it should be disclosed as early as possible (preferably in the offer to purchase) to the sellers that you currently own a property that is presently for sale, and request a prior sale contingency. The timing of the sale of your residence and new purchase can also be adjusted, and you may have to consider a transitional period between your two homes.  If you are concerned that your offer will be rejected with a prior sale contingency, you should speak with a qualified real estate lawyer about carefully crafting the mortgage contingency provisions in your purchase and sale agreement.