Most people buying houses today have only a vague idea of how the process really works. They know that the contract will be contingent upon their mortgage approval, and that if they fail to obtain a mortgage commitment, their contract deposit will be refunded.
What they don’t realize is that mortgage commitments can be withdrawn, if there is an adverse change in their financial condition, conditioned upon requirements they are unable to satisfy or that even the largest of financial institutions can fail and be unable to fund the mortgage they committed to.
So what happens if something goes wrong and the lender fails or refuses to fund the loan in accordance with the commitment? Will you get your deposit back?
Shockingly, the printed forms of the most commonly used contracts in New York State contain a mortgage contingency clause that provides that the purchaser will receive a refund of their deposit if they are unable to obtain a mortgage commitment from the bank, however, once the commitment is issued, this contingency becomes fully satisfied.
What this means is that if the bank issues a commitment but does not fund for any reason, you will lose your deposit!
You might ask: How could a lender issue a mortgage commitment, but then refuse or be unable to fund the mortgage? One possibility is that the bank itself could go out of business. Think this is impossible? Think again. Look at Lehman Brothers, American Home Mortgage and hundreds of other mortgage lenders which have closed their doors in the last 10 years.
If that happens, and you’ve signed the standard contract, you have satisfied the mortgage contingency and are obligated to close anyway! And if you cannot, you are out of luck – you may never see your deposit again!
So if these clauses are already printed in the standard contract forms, what can a buyer do? Just say no! Refuse to sign the contract unless this clause is modified to provide that your deposit is fully refundable if the lender does not fund the mortgage for any reason. This will protect you in the event that the bank goes out of business or refuses, for any reason, to fund the loan.
Sometimes you need to play hardball to make sure your life’s savings are fully protected. Before signing a contract, make sure you review every word of the mortgage contingency clause with an experienced real estate attorney and that you are willing to take the risks that the contract provides.
