When is a commitment not a commitment

When is a commitment letter not a bank commitment:
When the purchaser forfeits the deposit because of it

You have worked with a prospective purchaser for the past several months, and finally, your hard work has paid off because that purchaser has signed a contract and put down the required ten percent deposit. The purchaser has allegedly been pre-approved by a lender, and the transaction is well on its way to a successful conclusion depending on the application review by the cooperative corporation or condominium board of managers, if applicable. True to her word, the mortgage broker or bank representative issues a commitment within thirty to forty-five days of the contract execution. Unfortunately for you and the purchaser, the commitment is anything but what it claims to be because it is subject to several paragraphs of requirements and conditions, one of which includes the review of the finances of the condominium or cooperative building. In fact, within the next two weeks, you learn that the purchaser was denied by the lending institution because of the building’s finances or possibly because the purchaser’s employment status has changed. The purchaser’s attorney sends the letter of declination to the seller’s attorney expecting the return of the contract deposit; however, the seller’s attorney responds that unless the purchaser attends the closing and pays what is required according to the contract terms, the purchaser will be held in default and forfeit the contract deposit.

Pursuant to the standard form of a coop or condo contract or one to two family contract, a commitment that is conditional upon any factor other than an appraisal is considered a firm commitment, and the Purchaser cannot cancel the contract. Once a commitment is issued by the bank or mortgage company, whether it is issued two days after contract signing or two months later, if the bank does not complete the transaction for any reason other than a below-market appraisal, the purchaser can be held in default and lose her deposit. Even if the commitment letter is issued and not delivered to the seller’s attorney, the terms of the standard form of contract decree that the commitment is nonetheless deemed issued, and the risk is entirely on the side of the Purchaser.

The standard form of a contract of sale contains a mortgage or loan contingency, not a funding contingency. Many attorneys representing the prospective purchasers attempt to modify the standard language to allow the purchaser to terminate the contract and obtain the return of the deposit if and when the lender rescinds a commitment after it is issued; however, most sellers’ attorneys will not agree to modify the provision to allow for a funding contingency. If the purchaser’s financial status changes after the commitment are issued or if the building’s finances are downgraded by the bank, the risk of the commitment rescission falls entirely on the purchaser, and the seller would have the right to claim the contract deposit as liquidated damages.

The purpose of this article is to advise all agents working with purchasers not to rush the issuance of loan or mortgage commitment unless it is a firm commitment not subject to any conditions or contingencies. The consequences of the issuance of a commitment that does not actually commit will cause the triggering of a default if the transaction is not completed by the purchaser. Most importantly, if you are acting as a buyer’s agent with the requisite fiduciary obligations, you are held to a higher standard, and your involvement in the mortgage or loan process will determine whether you will be named in a lawsuit should the purchaser attempt to recoup her deposit from the seller so direct yourself accordingly. Submitted by Alfred M. Fazio, Esq. of Capuder Fazio Giacoia LLP. Visit our website at CFGNY.com for copies of recent articles as well as other areas of interest to the real estate community. If you would like to be added to our mailing list and receive future articles, please click the link below.