Mortgage contingency deadlines need to be doable

26 04 2010

Entry by Richard Vettstein, attorney via Rona Fischman in today’s Globe. If your agent makes the mortgage contingency deadline (the deadline for getting your deposits back if your mortgage application falls through) too close to the signing of the P&S, you may be in for trouble. I usually make mine AT LEAST two weeks out. I’m thinking maybe more in the current underwriting climate. Here’s the full article:

Last week, a very interesting decision involving the mortgage contingency provision of the standard form offer to purchase came down from the Massachusetts Appeals Court in Coviello v. Richardson. The case highlights the need for Realtors and real estate attorneys to be proactive with respect to mortgage contingencies and requests for extensions.The Facts
In the case, on February 12, 2008, the parties signed the standard form Offer to Purchase, which provided that a Purchase and Sale Agreement would be executed by 5:00 pm on February 26th. Under the mortgage contingency clause of the offer, which gave the buyer the right to cancel if she could not obtain financing, the buyer was required to secure a mortgage commitment by February 29th. The Realtor, who prepared the offer, made the first mistake here: asking the buyer to obtain a firm mortgage commitment not even 2 weeks after the offer is signed was completely unrealistic, especially in today’s tight underwriting environment.
Predictably, the buyer and her broker had immediate concerns that they would be unable to meet the mortgage commitment deadline. The broker asked the buyer’s attorney if he would ask the seller to agree to extend the commitment deadline for an additional week–a reasonable request.
The attorney, however, didn’t follow through on the request until 2 hours before the 5:00 pm deadline to sign the purchase and sale agreement. The seller, who was dealing with a high-risk pregnancy, didn’t want to extend the deadline. No agreement could be reached, and there was no tender or signing of the purchase and sale agreement.

The buyer sued, claiming that the seller’s refusal to agree to the extension was a breach of the deal. The Land Court initially ruled in favor of the buyer, but the Appeals Court overruled the decision in favor of the seller, holding that a jury would have to decide whether the seller repudiated the contract or would have proceeded with the original terms. The buyer is now in no better position. She is out thousands of dollars in legal fees, and no closer to purchasing the property.

Take Away
The lessons from this case are: (1) make the mortgage contingency dates workable in the offer, and (b) if you are asking for an extension at the 11th hour, cover the buyer’s rear-side in case the seller refuses to agree. The Realtor should have used a more realistic mortgage contingency deadline. In the current underwriting environment, Realtors should allow at least 30 days if not more from the signing of the purchase agreement to the commitment date.

Second, the buyer’s attorney’s delay in asking for the extension until the 11th hour certainly didn’t help the situation. But he could have protected the buyer a lot more had he coupled the request for the extension of the mortgage commitment deadline with either (a) notice that if the seller would not agree, the buyer would opt out of the deal entirely, or (b) offer to sign the purchase and sale agreement with the original deadlines (assuming the buyer would take on the risk). This would have “boxed in” the seller to either agree to the extension or go through the deal, essentially calling her bluff. At least it would have enabled the buyer to have been in a much better position for litigation because now the fight is over whether the seller would have gone through the original deal.

Of course, it’s much easier to play Monday morning legal quarterback…

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2 responses

26 04 2010
Richard Vetstein

Hey Joe, thanks for reposting my article. I would definitely advise on at least 30 days to get a commitment these days.

Nice blog you have got going here. Maybe we can work together in the future!

Richard D. Vetstein, Esq.
The Massachusetts Real Estate Law Blog

27 04 2010
Joe Wolvek

Thanks, Richard! Great article!

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