Mortgage Contingency Clauses - Deal Killers Follow-Up

Last evening, Lieb School came back to Newsday to start out 2013 lineup of courses. The first topic up was Deal Killers, which is my favorite course of all of our 15 licensed courses offered in our Course Catalog.

A large section of Deal Killers is devoted to not letting your deal die through understanding mortgage contingency clauses and how real estate agents should negotiate the shift of risk from the buyer to the seller when such a clause is added.

While discussing the topic last evening, we addressed a mortgage denial and explained the burdens of good faith and diligent efforts on a buyer. Next, we explained that even if  a buyer engages in some breach of the clause in bad faith, they may still prevail in cancelling the contract and having their down-payment returned if their breach is not the basis upon which the denial occurred.

To illustrate, I suggest our readers review the recent Appellate Division case of Ettienne v. Hochman where this precise scenario unfolded just this month. Therein the contract called for the buyer to apply for a "no-income-check mortgage", which the buyers failed to do and it seemed as if they were in breach. However, the Court looked to their basis of denial and found that "it would have been futile for them to additionally apply for a no-income-check mortgage" because they were denied based upon "their credit history" and not the type of mortgage applied for.

The takeaway for our readers is that while it matters that the buyer applies for precisely the mortgage called for in the contract of sale, a breach may not result in the buyer sacrificing his down-payment (assuming it is the liquidated damages for breach), if the buyer's failure to apply for the precise mortgage is unrelated to the basis for denial.

This case illustrates the exception to the rule where one would ordinarily have to follow the terms of the contract to the letter to be in compliance.