Scenario: You applied for a mortgage and received a written mortgage commitment, thereby satisfying the mortgage contingency in the Contract. A week before the closing you lose your job, and your mortgage commitment is withdrawn. Now what??

Mortgage commitments can be withdrawn for various reasons, such as changes in the buyer's financial situation (job loss or increased debt), property issues like low appraisals, or lender underwriting concerns. This unexpected setback can jeopardize the closing process, leaving buyers scrambling for solutions and jeopardizing the return of their deposit.

Understanding the Mortgage Contingency Clause

In New Jersey, most real estate contracts include a mortgage contingency clause, allowing buyers to cancel the deal without penalty if they fail to secure financing by a specified date. This clause protects buyers but requires strict adherence to deadlines outlined in the contract. However, in most cases, once the buyer secures a mortgage commitment, they cannot invoke the contingent if the mortgage commitment subsequently gets withdrawn. In other words, there is a gap in time from when the mortgage commitment is issued until the actual closing where there is a risk for both buyer and seller. Question is: who assumes that risk?

Steps to Take if Financing Falls Through

If your mortgage is withdrawn, start by contacting your lender to identify the issue and explore solutions, such as correcting errors or providing additional documentation. If that fails, consider seeking another lender quickly or enlisting a mortgage broker to expedite the process.

Negotiate with the Seller

If time is running out, you can request an extension from the seller to secure new financing. Sellers may require additional deposits or revised terms to agree, but this step can keep the deal alive while you explore alternatives.

Preventing Last-Minute Financing Issues

To avoid this scenario, buyers should maintain financial stability after pre-approval, avoiding large purchases or credit changes. Sellers, on the other hand, can protect their interests by ensuring buyers are pre-approved and contracts include clear financing deadlines.

Best to Address this Risk in the Contract

The best thing to do if you are a buyer is to address this risk in the Contract and see if you can get the seller to agree that the mortgage contingency will extent to the date of closing. This way, if the mortgage commitment is withdrawn through no fault of the buyer, the buyer can still cancel the transaction and receive back their deposit. Otherwise, the buyer may be in breach of the Contract and lose their deposit plus be liable to the seller for damages, even though the buyer is no longer able to close.

As always, navigating legal matters can be complex and requires the guidance of competent legal counsel to protect your rights and interests. Don't leave important matters to chance—retain reliable legal counsel to guide you every step of the way!