Mortgage Contingency: An Open Letter
To all prospective home buyers seeking financing to purchase a home
Where a Real Estate transaction involves a lending component, i.e. the Purchaser’s contractual obligation to perform under the terms of the contract is based on securing a loan commitment/approval, it is important to understand — very clearly — if the Buyer enters into a contract with this contingency…
- Either KNOWING (actual knowledge) or HAVING REASON TO KNOW (constructive knowledge), that his/her credit worthiness may not be satisfactory enough to successfully be approved for a loan;
- Their debt to income (DTI) ratio is skewed (meaning their liabilities far exceed their income);
- They electively change jobs while under contract;
- They are not US citizens/residents at the time of contract signing;
- They spend lavishly while under contract (thereby negatively affecting their credit score)…
…and as a result thereof, are subsequently DENIED financing.
This can be construed as WILLFULL and DELIBERATE default/breach of certain provisions in the contract of sale, and although the contract is contingent on Purchaser obtaining financing and the Purchaser was 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.
When a Seller is relying on the representations in a contract of sale, as well as good faith on behalf of the Purchaser (and it should be noted that implied good faith is an inherent part of ALL contracts), and the Buyer proceeds under false pretenses — or — with the following mindset(s):
- “My credit is terrible right now, but I’ll sign the contract and fix it up in the next month or two and THEN be fine to be approved for the loan”
- “My work VISA is expiring in a month, but I submitted my renewal application and I should be fine in two months so I can sign the contract now”
- “I’m getting laid off in a month, but I’ll definitely find a job right away so there won’t be any “gap” in my employment history”
… so I can sign now, essentially pinning their hopes to GETTING WHERE THEY ARE SUPPOSED TO BE, FINANCIALLY, at the inception of the contract at a later time — can constitute purposeful and willful default as well as detrimental reliance and false pretense even if the Buyer’s intentions were good as far as the follow through that was required after they signed the contract.
In addition, the mindset that the Pre-Approval doesn’t mean anything is totally inaccurate as both a matter of fact and law, as especially in this instance, the Pre-Approval can be used to substantiate the fact that the Purchaser was purposefully deceptive and intentionally non-transparent as to their actual financial standing when they initially engaged the Seller.
It should be abundantly clear — The Seller is not there to take the ride with a Purchaser 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, as during this entire time the Seller continues to carry all of the expenses for the home (mortgage, taxes, insurance, utilities), not to mention the fact, forfeits prospective Purchasers who ARE in a financial position suitable to see the closing to successful fruition.
In the event the contracted Purchaser 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, 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 Purchaser.
The take away — BE TRANSPARENT AND FORTHCOMING with your loan officer/mortgage broker if you are a Purchaser looking to buy a home but fall into this potential category. Also, you may want to consider advising your Realtor and Attorney of your situation, as well. There may be a possibility that this information is presented to the Seller, and the Seller makes an INFORMED DECISION to proceed with you as the Purchaser notwithstanding. In addition, the contract of sale can be tailored to incorporate these factors whereby there is no potential financial legal consequences for the Purchaser if something should not go as planned.
Also, if it becomes evident early on that mandatory events that must transpire so as to have the loan approved WILL NOT OCCUR, have the denial letter issued at THAT stage so as to assure any financial damages to the Seller are mitigated sooner than later.
A Real Estate transaction is meant to be an amicable legal event, NOT adversarial, contentious, or controversial. You are eventually entering a closing room, NOT a court room, and the intended end goal of ALL parties is the same — to see the closing to successful conclusion. That said, the transaction is also rooted in the fact of BUSINESS, NOT PERSONAL so if the Purchaser purposefully engages in any activity that can potentially be construed as improper when it comes to procurement of financing either before or during the contractual stage, the financial consequences can be disastrous, and the Seller will certainly seek every remedy available to them at both law and equity to protect their rights. In addition, even if the Seller’s Attorney is sophisticated and knowledgeable enough to secure retention of either a portion, or the entire down payment for the Seller as liquidated damages, the emotional strife and diminished mental solace damage to this Seller has already been done.
Lastly, most Buyer’s Attorneys in this precarious situation will do what they can to mount a defense for their client, even if the facts are anything but complex. And there is no room for interpretation as to the fact that the Buyer proceeded in bad faith, failed to demonstrate due diligence, etc. as far as pursuing the loan is concerned. After all, an attorney is obligated to zealously represent the best interest of their client. However, threatening to file a Lis Pendens (Lien) against the home to have the down payment returned is an empty threat and demonstrates desperation on the part of the Buyer’s Attorney as in this situation, the Lis Pendens can only be filed (as a Provisional Remedy) to compel SPECIFIC PERFORMANCE — meaning the Buyer WANTS the Seller to sell them the home, but the Seller is unjustly refusing to do so, which is the OPPOSITE scenario here. Albeit, the buyer’s title charges incurred by the Purchaser up to that point CAN be construed as a lien against the property whereby a lien can theoretically be filed by the Purchaser against the Seller’s home. But the only thing the Seller needs to do in this instance is reimburse the Purchaser for these negligible fees, thereby neutralizing the Buyer’s ability to file the lien against the house (in an attempt to prevent the Seller from selling to someone else), so as to have the Seller’s Attorney return the down payment to his/her client. If this reimbursement of title fees occurs, and the Buyer’s Attorney nevertheless proceeds with filing a Lis Pendens against the Seller’s home, he/she can be subjected to possible ethical sanctions, as the CPLR can construe such a course of action to be “improper, prejudicial and punitive” against the Seller.
In summation, the American Dream of owning a home is what all Dreamers of Dreams desire. That said, 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. If you require 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.
No one ever wants to be scared by a bad closing experience.
