What you need to know about “mortgage contingency” terms

A very comon scenario: A RI couple put down a $45,000 deposit on an $885,000 home, and signed an agreement saying the purchase was contingent on the couple’s being able to get a mortgage for the remaining $840,000. Sometime later, the couple told the builder that they weren’t going to apply for a mortgage and weren’t going to go through with the deal.

The builder refused to return the $45,000 deposit, and the case went to court.

The result? The builder got to keep the $45,000 deposit.

A couple couldn’t back out of a deal just because their income went down and they thought they could no longer get a loan.

If a “mortgage contingency” in a contract says that the purchase is contingent on the buyer’s being able to obtain a mortgage, this creates an obligation on the buyer’s part to actually apply for a mortgage, the Court decided. A buyer can’t just change his or her mind and renege on the deal without applying.

In this case, the couple claimed that they had signed the contract assuming that a separate business deal would go through, and when it fell apart, they didn’t apply for a mortgage because they figured they wouldn’t be able to get one. The couple also claimed the builder knew the deal depended on the business deal going through.

However, there was nothing in the purchase-and-sale agreement that made the real estate contract contingent on the business deal. And even if the couple didn’t think they could still obtain a mortgage, that didn’t release them from their legal obligation to apply for one, the court said.

While the law varies from state to state, the moral of the story is that if your ability to finance a real estate deal depends on something else – a separate deal, a gift, a family loan, or whatever – this needs to be taken into account when you sign a purchase-and-sale agreement. If you don’t say anything about the separate contingency in the agreement, then you may be on the hook if the thing you’re depending on doesn’t actually happen.