One of the must mis-understood concepts is the “Mortgage Contingency Clause,” and how you, as a home buyer, must diligently protect your right to cancel a real estate contract if you are unable to secure a mortgage. This blog is not about the situation where your Bank issues you a mortgage commitment, and then pulls out of the deal for some reason. By then, you have likely waived your mortgage contingency.
In New York State, signing a contract to purchase real estate is usually accompanied by a “downpayment,” which is held in escrow by the seller’s attorney. The downpayment is sometimes called an “earnest money” deposit. (I always thought that such term appropriately described the deposit because you are “excited” to be purchacing a house, but you must earnestly apply for a mortgage. Many times, it is traditional to put as much as ten percent of the cost of the house up as a “downpayment,” and that is the amount at risk if you do not properly apply for your mortgage.
In New York, the downpayment also represents a seller’s damages if the buyer breaches the contract and refuses to purchase the house without justification. A downpayment can represent up to ten percent, or more, of the purchase price depending on negotiations between buyer and seller.
An artfully drafted contract prepared by a real estate lawyer will include provisions such as a mortgage contingency clause, which calls for the seller to return the downpayment to the buyer if the buyer is unable to obtain a mortgage to purchase the property. This seems straightforward, but litigation often arises surrounding the return of a downpayment to a buyer claiming an inability to obtain financing. In today’s world, there are many ways for a bank to cause problems for a buyer and her attorney. Without careful attention to dates, deadlines and notice provisions, getting your down payment back can be difficult.
One sure way to lose your down payment is to apply for a mortgage which is greater than the amount requested in the Mortgage Contingency. According to the New York courts, if you apply for a mortgage for an amount greater than the amount in your contract, you will lose your downpayment. This is because in New York, applying for a mortgage greater than the contract price is a breach of contract as a matter of law. See, Silva v. Celella
In other words, a court will likely find that you violated your mortgage contingency clause, and not be entitled to return of your downpayment because you breached the contract. An experienced real estate attorney can review your mortgage application and guide you through the financing process to avoid and minimize these risks.
In another case, Humbert v. Allen, involving legal malpractice claims, the attorney didn’t send notice that the plaintiffs were denied a mortgage. However, the court held that the plaintiffs didn’t suffer damages because they applied for a mortgage twice the amount of the contract price, so they breached the contract anyway.
The bottom line– there are many traps for the unwary. You should thoroughly discuss your obligations to apply for a mortage and request the down payment back under the terms of the real estate contract presented.