Monday, December 2, 2024
When buying a home and a mortgage is needed to do so, understanding the mortgage contingency in any contract is critical for both the home’s buyer and seller.
This contingency means the buyer’s ability to complete the purchase depends on getting approved for a loan. However, if certain issues arise, buyers could risk losing their deposit—even if the loan application is denied.
Here's what to watch out for, according to seasoned New York State Real Estate Law & General Practice Attorney Anthony A. Nozzolillo, Esq.
If financing falls through because of these or similar issues, a seller may argue that the prospective buyer acted irresponsibly or in bad faith, which could lead to the buyer losing their deposit.
“This can be construed as willful and deliberate default or breach of certain provisions in the contract of sale,” Nozzolillo explained. “Although the contract is contingent on the buyer obtaining financing and they were issued a Loan Denial Letter, the totality of the circumstances—coupled with the backstory as to why financing was denied—could place the Buyer in a situation where he/she can potentially forfeit their downpayment to the Seller as liquidated damages.”
Sellers rely on buyers to be upfront about their financial stability. If you're not currently in a position to qualify for a loan but hope to fix things while under contract—like repairing your credit or waiting for a visa renewal—you’re taking a big risk. Even if your intentions are good, this could be seen as acting in bad faith.
“It should be noted that implied good faith is an inherent part of all contracts, and if the Buyer proceeds under false pretenses or with the following mindsets, it can constitute purposeful and willful default as well as detrimental reliance,” Nozzolillo said.
“Even if the buyer’s intentions were good as far as the follow through that was required, they’re still pinning their hopes to getting where they are supposed to be financially after they already signed the contract,” he added.
Some buyers think a pre-approval letter is just a formality, but it’s actually a key indicator of your financial readiness. If a lender denies your loan later, the pre-approval can reveal whether you were less financially stable than you claimed at the start.
Sellers have ongoing costs like mortgage payments, property taxes, and utilities while waiting for a sale to close. If a deal falls apart because a buyer wasn’t financially prepared, the seller not only loses time but also risks missing out on other potential buyers.
“It should be abundantly clear — the seller is not there to take the ride with a buyer who (at the time of contract) is not in a position suitable to be approved for a loan but is confident and optimistic that they will attain that position while under contract,” Nozzolillo said.
Additionally, during that waiting period, the seller continues to pay mortgage, taxes, insurance, utilities on the home and can lose out on any buyers in the suitable financial position.
“In the event the contracted buyer is engaging in this sign and pray ideology as far as hoping they are qualified for financing during the contractual stage, they are unduly prejudicing the Seller,” Nozzolillo added. “Not to mention the fact, if they are denied the loan because they couldn’t fix their credit mid-contract, or their Visa renewal application was denied mid-contract, etc., that now means the seller has to start all over again, find a new buyer, and continue to now pay the carrying expenses for the home in perpetuity, not to mention the fact, are now mentally frightened that this result may present itself yet again with the new buyer.”
To avoid financial and emotional fallout for everyone involved, here’s how to prepare:
In cases where a buyer cannot secure financing where “intentional impropriety” occured on the part of the buyer, their attorney may try to defend them, even if the buyer acted irresponsibly or in bad faith, Nozzolillo noted. Threats to file a Lis Pendens (a legal claim to the property) to recover the buyer's down payment are often baseless, as such a claim is only valid when the buyer seeks to compel the seller to complete the sale, which doesn’t apply in these situations.
If the seller reimburses the buyer for minor title fees, it neutralizes any legitimate basis for a lien. Should the buyer's attorney proceed with filing a Lis Pendens after this, it could lead to ethical violations, as such actions may be deemed improper and punitive.
Buying a home should be an exciting and smooth process, not a contentious one. Sellers want to close deals, not end up in legal disputes. If buyers are upfront about their situation and work with professionals to address potential issues early, everyone can avoid unnecessary stress and costly mistakes.
If a buyer needs financing to buy a home, they should do their homework, be honest about their financial situation, and work closely with their team. This will give you the best chance of turning your dream into reality without creating a nightmare for yourself—or the seller.
“The American Dream of owning a home is what all Dreamers of Dreams desire. That said, buyers should keep in mind that you are purchasing the home from a seller who is relying on the fact that they will not be made to suffer so that your dream can become a reality,” Nozzolillo said.
“If a buyer requires loan financing, prior to proceeding, speak with a licensed New York State Mortgage Broker; be forthcoming with your existing (and potential) financial situation. More is better as far as the amount of information you relay at this juncture,” he added.
“No one ever wants to be scarred by a bad closing experience.”
THE INFORMATION CONTAINED IN THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS LEGAL ADVICE. NO ATTORNEY/CLIENT RELATIONSHIP OF ANY KIND IS HEREWITH CREATED. READERS ARE TO OBTAIN THE OPINION OF THEIR OWN INDEPENDENT COUNSEL.
