What Bank Troubles Mean for Your Mortgage

What Bank Troubles Mean for Your Mortgage. Home buyers shopping for a mortgage have a new source of stress: the health of their bank.

After the collapse of Silicon Valley Bank, shares of many regional banks have fallen sharply this week. First Republic was downgraded to junk status Wednesday by Fitch Ratings and S&P Global. The fallout has created a cascade of anxiety among homeowners and home buyers, given that regional banks are a source of home loans even as few banks have failed.

If you own your home and your mortgage lender goes out of business, there is no need to stress. Someone else will buy your loan, and you’ll continue paying your mortgage to the servicer that takes over the loan.

Real estate lawyers said those buying a home right now might want to take extra steps to protect their deposit on the property they hope to buy. One way to do this is to ask for the purchase agreement to include a provision if the lender goes out of business or can’t provide the loan for reasons beyond the buyer’s control.

Known as a funding contingency, the clause ensures the buyer won’t lose their deposit money and should be included in most contracts now, said Daniel Gershburg, a real estate lawyer in New York for the New York Times Digital.

What Bank Troubles Mean for Your Mortgage

“Asking for a funding contingency will be seen as an increasingly reasonable request,” Mr. Gershburg said for The Wall Street Journal Print Edition.

Funding contingencies were more common about three years ago when some buyers were concerned about access to the banking system at the height of the Covid-19 pandemic. He said these requests subsided as people realized they would still be able to get loans.

Sellers likely won’t argue with this request from buyers, said Mr Gershburg. If they have a buyer with solid financials, sellers will generally accept this stipulation, which allows the buyer to find another lender within a certain period, usually 30 days.

Becki Danchik, a real estate agent in New York, said funding contingencies still aren’t common, but more buyers have begun asking for them. She said some buyers are asking for funding contingencies not because they are necessarily concerned about their lender’s financial health but because they perceive more leverage over sellers.

“Some buyers ask for anything possible because they can,” she said for Bloomberg Digital Subscription.

Borrowers should research multiple mortgage lenders and apply for preapproval from at least three, said Kate Wood, a home and mortgage specialist at NerdWallet.

Applying for a mortgage with more than one lender does mean paying multiple application fees, which may run as high as about $500 and are generally nonrefundable. Still, you’ll be able to compare loan estimates, she said.