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Buying With or Without a Mortgage – A Balancing Act

balance2In today’s fast-paced market, an all-cash buyer is very attractive to sellers of cooperative units.  As banks are increasingly sluggish in giving out mortgages, they are creating undesirable delays in the process of buying and selling property.  To avoid the inevitable setbacks associated with obtaining a mortgage to purchase a cooperative unit, if feasible, it may be advisable to purchase the unit with cash and obtain a mortgage after the closing.

Obtaining a Mortgage Pre-Closing

The typical scenario for purchasing a cooperative unit with a mortgage is as follows: a mortgage contingency or non-contingency clause is drafted in the contract.  Most cooperative boards require a copy of the mortgage commitment letter as part of the purchase application so the purchaser cannot submit the application until they have obtained the commitment letter.  The purchaser then typically may have 30 days to obtain the commitment letter after signing the contract followed by a few business days after receipt of the letter to submit the application to the board.

The practical result of purchasing the unit with a mortgage is that the purchase application will be delayed until a mortgage commitment is obtained.  This is very unattractive for the seller who needs to know if the buyer will pass the board’s muster as swiftly as possible.

Obtaining a Mortgage Post-Closing

If it is feasible, the purchaser may want to consider buying without a mortgage and obtaining a mortgage after the closing.

However, this has several pitfalls.  First, under IRS Publication 936, the purchaser will not be able to deduct the interest from the financing unless the mortgage is obtained within 90 days of the closing date.  This time constraint could be an issue on multiple fronts.  First, the new shareholder will be required to obtain the cooperative board’s consent prior to being allowed to get the mortgage.  As such, there is the risk that the cooperative board may not approve of the shareholder’s decision to obtain financing.  Second, even if the cooperative board is amenable to the mortgage, they may be unhurried in approving the same.  Consequently, the board’s approval process puts the shareholder at risk of not meeting the 90 day deadline mandated by the IRS.

Another disadvantage of obtaining the mortgage post-closing is that the interest rates available to the borrower may not be as favorable.

However, this may be worth the risk to the buyer who really wants to trump the competition.

By Ryan V. Stearns and Jerome J. Strelov

Category: Board Packages, Funding Contingency, Mortgage Contingency, News, The Buyers World Comment »


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