A mortgage contingency can give a buyer a way to cancel a purchase and recover the contract deposit if financing fails under the conditions stated in the contract. Waiving it can make an offer more attractive to a seller, but it also means taking responsibility for closing even if the expected loan does not come through.

Before agreeing to a waiver, understand what the lender has actually approved, what remains unresolved about the apartment and building, and how you would complete the purchase if the financing changes. A preapproval letter alone does not answer those questions.

What a mortgage contingency protects

The contingency is a negotiated contract provision. It generally ties the purchase obligation to obtaining a qualifying loan commitment within a specified period. The amount of financing, application requirements, cancellation rights and notice deadlines all matter. Your attorney should explain the provision in your actual contract and any rider that changes it. [1]

For a NYC co-op, the loan is secured by shares and a proprietary lease rather than a deed to the apartment, but buyers still commonly refer to the protection as a mortgage or financing contingency.

The practical distinction is whether a financing problem gives you a contractual right to leave the transaction. If you waive that protection, a lender's refusal generally does not excuse you from purchasing. Your contract deposit may be at risk if you cannot close. The contract controls the seller's remedies; do not assume that losing the deposit is the only possible consequence.

A noncontingent offer is also different from a promise to purchase entirely with cash. A buyer may be permitted to seek financing while accepting the risk of its failure. Have your attorney confirm that the contract accurately describes your plans. [2]

Preapproval is an early step

Lenders use the words prequalification and preapproval differently. The Consumer Financial Protection Bureau cautions that these letters are not guaranteed loan offers. Ask what documents the lender reviewed and what assumptions support the letter. [3]

For example, a buyer's income may look sufficient based on a recent pay stub, while a full review of bonus income, business returns or an employment change leads to a different result. Funds that appear on an investment statement may also require documentation before they can be used at closing.

An offer becomes more credible when the lender has reviewed your actual finances. But borrower approval still leaves property questions open. The lender must be comfortable with the apartment's value and the building itself. A co-op or condo can present financing issues even when the buyer has excellent credit and substantial assets.

Ask your lender to identify what remains outstanding in writing. Useful questions include whether underwriting has reviewed your income, whether the appraisal is complete, and whether the building has received the approval required for your proposed loan.

The building can affect the loan

Building review is separate from evaluating your ability to make monthly payments. Co-op lenders may examine financial statements, the operating budget, insurance and other project requirements. Fannie Mae's co-op eligibility rules, for example, address cash flow, reserves and the building's debt. Different loan programs and lenders can apply different standards. [4]

Ask whether the lender has recently financed purchases in the building, then confirm that its review applies to your loan today. An earlier closing does not establish that current financials, insurance or lease terms are acceptable.

Your attorney's diligence and the lender's review serve different purposes. Both should proceed while you evaluate the purchase. Our guide to NYC building financials explains several documents buyers should understand before committing.

A low appraisal can require more cash

A financing contingency and an appraisal contingency are related, but they are not interchangeable. A separate appraisal provision can tie a cancellation or renegotiation right to a stated value. A mortgage contingency depends on its own wording and whether a qualifying commitment is obtained. A low appraisal does not automatically let every buyer cancel. [2]

Consider this hypothetical purchase. You agree to pay $2 million and expect to borrow 80% of the price. The lender instead values the apartment at $1.85 million and limits the loan to 80% of that value.

The additional cash is $120,000, before closing costs and reserves. The seller does not have to reduce the agreed price simply because the appraisal is lower. You may be able to negotiate, challenge a supported appraisal error or explore another loan, but none of those outcomes should be assumed. [5]

The example assumes the lender uses the lower value and permits the illustrated loan. Your lender must confirm its actual policy, and a co-op may impose its own financing limit.