When you sign a contract to buy real estate, it includes a mortgage contingency clause.This clause allows you (typically) 45 days to obtain a mortgage. You must exercise good faith in doing so. If you cannot show a commitment letter within this timeframe, you have the option to ask the seller for an extension of time or get a return of your contract down payment. Once you have a commitment letter and show proof of same, you have done your job. A few last minute items for the bank, homeowner’s insurance and legal jargon and you are at the closing table.

     Here is the big problem. Once you show your commitment letter you have to close. There is no language in the clause that states if your bank goes under, or if they will not provide the loan product you have in your commitment letter, you can get your down payment back. Once you show the commitment letter, you are actually not protected under the clause anymore.What your attorney needs to do is add language that will protect you against this. It should that if the chosen lender goes out of business, you can get an extension of time to procure another loan elsewhere. Also, that if the loan product outlined in the commitment letter is no longer provided by the lender, you have time to obtain a similar loan elsewhere. Either way, you also want to get your money back if you cannot find a similar product.

     The problem is that very few seller attorneys will allow this language to put into the contract. They might give you an extension, but will not give you back your deposit.

     How should you protect yourself? If you are getting a mortgage that is deemed risky by today’s standards, I would make sure I have approvals from more than one lender. You would always want a backup. Make sure that if you use a mortgage broker that they do this and are ready to close at more than one lender. Use a reputable company and keep your fingers crossed. Always have a backup plan.

– Dale Siegel