Q: I know that many residential real estate transactions contain a “mortgage contingency.” I have heard that some transactions contain a “funding contingency.” What is the difference between a mortgage contingency and a funding contingency?
A: A mortgage contingency generally refers to a purchaser’s ability to cancel a contract of sale in the event that the purchaser is unable to obtain a written loan commitment from a lender (meeting the financing terms set forth in the contract) on or before a specified date in the contract of sale.
By way of contrast, a funding contingency generally refers to a purchaser’s ability to cancel a contract of sale if the lender, after the loan commitment is issued, unilaterally decides not to provide the loan proceeds to the purchaser. Therefore, a purchaser’s obligation to purchase is conditioned upon the lender providing funds to the purchaser at the closing.
Important Tip: The use of a mortgage contingency is customary in many residential real estate transactions. Conversely, a funding contingency is unusual and was more prevalent several years ago when certain lenders were unwilling or unable to fund a loan at the closing.
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP