What if the Mortgage Company Revokes my Mortgage after a Commitment was Issued in New York.

Yesterday’s Blog dealt with what happens if you don’t diligently apply for your mortgage while attempting to buy a house. But, what happens if you got your commitment and the bank thereafter revokes it?

According to the case law, a purchaser should be entitled to return of the down payment. Kapur v. Stiefel (1999) 695 N.Y.S.2d 330, 264 A.D.2d 602 (1999). In that case, the purchaser obtained a refund where the mortgage commitment was revoked, makeing the mortgage contingency clause (generally relied upon to cancel the contract)unavailable. This is not automatic, and the question becomes whether the purchaser acted in “bad faith,” or intentionally caused the bank to withdraw the commitment. Although litigation might errupt over whether the purchaser acted in bad faith, if a court finds that they did not (based upon documentary evidence), then the purcahser should be able to get the money back from the seller.

Specifically, the Court held:

“Inasmuch as plaintiff’s mortgage commitment letter was revoked by the lender after the contingency period, the provision in the contract of sale conditioning plaintiff’s right to the return of his escrowed down payment upon his cancellation of the contract within seven business days after the date specified for obtaining the commitment letter was inapplicable. Nor, under the circumstances at bar, involving a commitment revocation as opposed to the failure to obtain a commitment in the first instance, was plaintiff’s cancellation of the contract otherwise governed by specific provisions of the parties’ contract. This being the case, plaintiff purchaser’s right to the return of his escrowed down payment turns instead upon whether the commitment revocation and consequent failure of the transaction was attributable to bad faith on plaintiff’s part (see, Creighton v Milbauer, 191 AD2d 162; Lunning v 10 Bleecker St. Owners Corp., 160 AD2d 178, lv denied 76 NY2d 710; Lane v Elwood Estates, 31 AD2d 949, affd 28 NY2d 620).”

The case cites Lunning v 10 Bleecker St. Owners Corp., 160 AD2d 178, lv denied 76 NY2d 710 (1990), where the court held, “When a condition of a mortgage loan commitment is not fulfilled through no fault of the purchasers, their performance is excused, so long as they acted in good faith.”

The Bottom Line– if you find yourself in the unfortunate situation of having obtained a mortgage, and the bank does not thereafter fund it, through no fault of your own, you have case law on your side, and you should consider litigation to obtain a refund of your down payment.