THE UNCERTAINTY OF MORTGAGE CONTINGENCIES
By: John B. Newman
Most buyers of homes require mortgages in order to close. Accordingly, most contracts include what is called a mortgage contingency. The mortgage contingency provides that the contract may be cancelled by either buyer or the seller if a mortgage commitment for the required amount is not obtained by a specified date.
In most cases, a mortgage commitment is obtained by the deadline or the parties agree upon an extension and a mortgage commitment is obtained by that deadline. Then, within 10 to 20 days thereafter the mortgage is funded and the closing occurs.
However, every mortgage commitment has certain conditions, some which are standard in every mortgage commitment for a particular lending institution and some of which are special for a particular transaction. One such standard condition which is found in every mortgage commitment is that there be no material adverse change in the financial condition of Borrower. Pursuant to such a condition, a bank is within its rights in revoking a mortgage commitment if the borrower loses his job before the closing. The question is what happens to the real estate contract.
Until recently, it was a law in New Jersey that if the borrower lost his job through no fault of his own or the commitment was revoked through no fault of the borrower, then the borrower would still have a right to cancel the contract and obtain return of his deposit. However, in the recent case of Malus v. Hager decided by the Appellate Division in June, the court held on facts just like these that once the mortgage commitment was obtained, the mortgage contingency was satisfied. So later changes in circumstances, even those beyond the control of borrower, did not relieve the borrower of his obligations under the contract. The court noted:
If the parties wish to provide in their contract for an eventuality such as this, they are free
to do so. We decline, however, to impose the risk of an otherwise firm deal unraveling
upon an unknowing and blameless seller, leaving him with no ability to recoup his increased
expenses.
It is unclear now how the marketplace will react to enhanced mortgage contingency clauses which shift the risk of the bank's revocation of the commitment letter from the buyer to the seller. However, these clauses need to be discussed thoroughly, particularly in the context of the amount of the deposit and whether or not the contract provides for forfeiture of the deposit upon breach.
This issue is an example of the principle that there is nothing routine about a residential real estate closing.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
Most buyers of homes require mortgages in order to close. Accordingly, most contracts include what is called a mortgage contingency. The mortgage contingency provides that the contract may be cancelled by either buyer or the seller if a mortgage commitment for the required amount is not obtained by a specified date.
In most cases, a mortgage commitment is obtained by the deadline or the parties agree upon an extension and a mortgage commitment is obtained by that deadline. Then, within 10 to 20 days thereafter the mortgage is funded and the closing occurs.
However, every mortgage commitment has certain conditions, some which are standard in every mortgage commitment for a particular lending institution and some of which are special for a particular transaction. One such standard condition which is found in every mortgage commitment is that there be no material adverse change in the financial condition of Borrower. Pursuant to such a condition, a bank is within its rights in revoking a mortgage commitment if the borrower loses his job before the closing. The question is what happens to the real estate contract.
Until recently, it was a law in New Jersey that if the borrower lost his job through no fault of his own or the commitment was revoked through no fault of the borrower, then the borrower would still have a right to cancel the contract and obtain return of his deposit. However, in the recent case of Malus v. Hager decided by the Appellate Division in June, the court held on facts just like these that once the mortgage commitment was obtained, the mortgage contingency was satisfied. So later changes in circumstances, even those beyond the control of borrower, did not relieve the borrower of his obligations under the contract. The court noted:
If the parties wish to provide in their contract for an eventuality such as this, they are free
to do so. We decline, however, to impose the risk of an otherwise firm deal unraveling
upon an unknowing and blameless seller, leaving him with no ability to recoup his increased
expenses.
It is unclear now how the marketplace will react to enhanced mortgage contingency clauses which shift the risk of the bank's revocation of the commitment letter from the buyer to the seller. However, these clauses need to be discussed thoroughly, particularly in the context of the amount of the deposit and whether or not the contract provides for forfeiture of the deposit upon breach.
This issue is an example of the principle that there is nothing routine about a residential real estate closing.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
