The scenario usually plays out like this: you sign the contract of sale (of course, you are ecstatic). You give the mortgage broker or loan officer everything he/she requests, i.e., bank statements, credit report, tax returns, pay stubs, letters of explanation, etc. Suddenly, there is a stop in the process: the appraisal falls short of the contract price; you have insufficient income; you have lost your job; the condominium building or project is not FHA approved; or for whatever reason the lender gives you. You get the dreaded phone call from your mortgage company that you have been denied. You are nervous because the realtor, the seller, or someone you know tells you that you will lose your down payment if you do not buy the house. What is even worse is that you tendered your life savings as a down payment. You scream, I want my money back! Well, can you get it back? The answer is: it depends.
Is your contract contingent upon mortgage financing? If it is, the answer is: yes, but provided that you have satisfied the terms of the contract.
A mortgage contingency is a contractual provision that gives a purchaser a chance to secure mortgage financing. If the contingency fails, the contract is terminated.
However, in order for you to recover your down payment, you must comply with the terms of the contract, including, the mortgage contingency. In other words, if you have promptly and diligently applied for a mortgage timely and in good faith within the specified time period for the same loan amount listed in the contract, you will get your money back.
Obviously, like all other contracts, the terms and provisions of a contract vary and your specif
ic factual circumstances may dictate a different outcome. A carefully drafted mortgage contingency clause in your favor is extremely important and may determine whether or not you will receive a return of your down payment.
In most cases, a seller does not want to retain your down payment. The ultimate goal for a seller is to sell the house to you and not litigate with you over a down payment. Unfortunately, a seller may feel that he/she is justified in retaining your down payment for your failure to obtain financing. In this situation, you cannot do anything, but commence a lawsuit to recover your down payment.
So, how do I get my money back? Your attorney notifies the seller or seller’s attorney of the mortgage denial. This letter is usually accompanied by a denial letter from the lending insitution setting forth the reason for the denial.
A mortgage commitment is a bank’s willingness to lend monies to you based on certain conditions. Once a mortgage commitment is issued, a contract becomes firm (meaning that the contract is no longer subject to mortgage financing – in essence, an all cash deal). Once a mortgage commitment is issued, most contracts provide that you must close title to the property even if the lender fails to fund the loan for any reason.