When Decisions Matter.

The Mortgage Contingency Clause – Who Can Pull the Trigger to Kill the Deal?

So, assume Buyers promptly and in good faith make a mortgage loan application in conformance with the terms of their Agreement of Sale.  Bad news follows—lender rejection, story is over, Buyer walks.  Right?  Guess again.

Paragraph 8.g.1 of the PAR Agreement of Sale gives the Seller the exclusive control of exercising the mortgage contingency clause.  In short, only the Seller has the power to pull the trigger on the mortgage contingency clause and terminate the Agreement if the mortgage commitment is not received by a specified date.  It reads as follows:

“If a Seller does not receive a copy of the mortgage commitment(s) by the mortgage commitment date, Seller may terminate this Agreement by written notice to the Buyer.  Seller’s right to terminate continues until Buyer delivers a mortgage commitment to Seller.”

So, what is our Buyer obligated to do?  Try again?  Yes.  Due to the mortgage contingency clause, the Buyer is obligated to continue to seek financing beyond the mortgage commitment date stated in the Agreement, theoretically, up until the time of settlement.  However, keep in mind that until the mortgage commitment is obtained and actually delivered to the Seller, the Seller continues to have the absolute right to terminate the Agreement.  So, how do we protect our Buyer?

Practice Tip No. 1:  Negotiate a provision in the original Agreement of Sale that permits the Buyer the right to terminate the contract if financing is not received by the specified mortgage commitment date.

Practice Tip No. 2:  If the Buyer cannot get financing by the terms of the Agreement and wants out, request a Termination and Release of Deposit to be executed by both Buyer and Seller.

Practice Tip No. 3:  :  If the Seller will not release or the Buyer wants to try again to get financing, get a written extension for both the mortgage commitment date and the subsequent date of settlement.

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