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What's a "good faith effort" to get a mortgage?

QUESTION:

My brother recently signed a purchase agreement and put a deposit on a house that my sister-in-law had not seen. She did not like the house at all when she finally did see it. Now they don’t want the property. The purchase contract has a mortgage contingency that requires a written mortgage commitment. My brother never applied for the mortgage and believes he will get his deposit back because he never received the written commitment from the bank. I think he will lose his deposit. Who is correct?

ANSWER:

All contracts require "consideration" in order to be binding, and lack of consideration can affect the legality of the contract. Consideration is usually money that accompanies the offer. This is sometimes called "earnest money" because it demonstrates the "earnestness" and sincerity of the buyer.

Earnest money is held by a real estate broker or other third party in a bank account that is separate from other bank accounts and may not be used for anything except the transaction to which it applies. The money is returned to the buyer when something prevents the sale from taking place and if the contract provides that the money will be returned to the buyer if a certain event occurs or does not occur. However, if the buyer defaults, the contract usually provides that the deposit is given to the seller.

A contract that contains a mortgage contingency allows for a deposit refund if the buyer has made a good faith effort but has been unable to obtain a mortgage. This contingency clause contains language that states the length of time, usually seven days, in which the buyer has to make the mortgage application. It may state how long the buyer has to receive the written mortgage commitment, usually 50 days.

If the buyer applies for his mortgage and does not receive a written mortgage commitment within the time specified, it is usually the responsibility of the buyer to notify the seller in writing that the mortgage has not been obtained. The earnest money may be returned to the buyer at this time. Sometimes both parties agree to extend the time period that the buyer has to obtain a mortgage.

Performing each of the steps required by the contract is important to the determination of whether earnest money should be refunded. If, for example, the buyer does not obtain a mortgage but fails to notify the seller in writing, the money may be given to the seller.

Your brother is most likely in default of his contract and will probably lose his earnest money because he did not perform according to agreed upon terms. His contract probably required him to make a mortgage application within a certain number of days and he did not do this. The fact that he did not receive a written mortgage commitment is the result of his not applying, not the result of a good faith effort.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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