The mortgage commitment contingency is a clause in standard residential real estate contract used in the greater New York City area that makes the purchaser’s obligation to purchase contingent upon being able to obtain a mortgage commitment from a lender. This clause affords protection in that the purchaser has the right to cancel a real estate contract and obtain the return of the down payment if the buyer is unable to obtain the commitment within a certain amount of time. The purchaser must, however, comply with the notice requirements in the contract of sale. The standard mortgage contingency clause also affords the seller the right to cancel the contract if a commitment has not been accepted by the purchaser by the commitment date specified in the contract.
While this seems simple enough, the rights and obligations of the purchaser and seller under this clause are often misunderstood or not taken seriously enough. Unless a purchaser is going to be paying cash or using some other form of liquid capital, there should always be a mortgage commitment contingency clause in the contract that protects the buyer’s rights to cancel and receive the return of the contract deposit.
Typically, the contingency clause will allow a purchaser 30-60 days to secure the commitment letter from the financial institution that will be loaning the funds to the purchaser. It is best practice for the contract to include the details of the mortgage loan such as the amount being borrowed, the type of loan (fixed rate, FHA, VA, adjustable rate), and the term of the loan (30 years is the most common). This way the purchaser and seller are on the same page as to the purchaser’s loan details and the contingency is based on the purchaser obtaining a mortgage commitment for that type of loan.
If the purchaser is unable to obtain the necessary financing, this must be communicated to the seller prior to the expiration of the commitment contingency period or the buyer can still be bound by the terms of the contract. A purchaser can also ask the seller for an extension of the commitment date if the commitment date is approaching and the purchaser has not received a firm commitment letter.
If the purchaser does not comply with the mortgage contingency clause, there is a possibility that the seller could cancel the contract but keep the down payment as liquidated damages. The mortgage commitment contingency offers protection to both parties, but it also creates liabilities if not followed properly. Therefore, it is critical for New York real estate purchasers to understand this clause. Hiring a real estate attorney with knowledge of the nuances of this clause is another way to protect our interests.
The New York County Supreme Court case of Sanjana. v. King (July 19, 2018, NY Law Journal), illustrates the dangers of the mortgage contingency clause. The parties entered into a contract for the sale of a condominium located in New York City. In this case the purchasers had received a conditional approval, which consisted of an initial letter from Quicken Loans, which identified 18 separate items the borrower-purchaser was required to provide and emphasized that “Once we receive the items from you and the third parties, we will conduct a final review of the loan documents. As soon as we complete the review and issue a final approval, we will contact you to coordinate closing.” However, this conditional approval was later revoked by the Lender after the commitment date and time for cancellation of the contract had expired. Quicken Loans decided not to provide final approval for the loan because the condo’s HOA did not contribute at least 10 percent of their monthly dues to a reserve account. The Court determined that the conditional approval was only a preliminary approval and not a mortgage commitment at all. The Court further found that the purchaser’s lost their right to cancel and receive the return of the down payment because they did not strictly comply with the mortgage contingency clause. Justice Arlene Buth ruled in favor of the sellers and the purchasers’ down payment of $110,000.00 was forfeited. This result could have been avoided if the purchasers obtained an extension of time on the commitment date or cancelled the contract in a timely manner based on the mortgage contingency. While the judge noted that losing the sizeable down payment might be a harsh outcome, she pointed out that she cannot re-write the terms of the contract that was signed and entered into by these the parties.
Danziger Legal PLLC does everything we can to protect our client’s down payments. We calendar all commitment dates, review the commitment letters carefully, and discuss the conditions within the commitment letter with our clients. Importantly, when the commitment date approaches, we often demand an extension of time or conditionally cancel the contract in order to protect our client’s down payments. Down payments are usually 10% of the purchase price and represent significant funds that often our clients have saved over months or years. It is our job to ensure these funds are safeguarded. Please call us to day to discuss your real estate related legal needs.