It happens. The buyer makes a good faith mortgage application and does everything requested of her, and yet, her application is denied. If the date for securing a mortgage commitment has not passed does the buyer have an obligation to make another mortgage application?
That question was answered by the Pennsylvania Superior Court in a 1985 case, Ormond Realty v. Ninnis. The facts of that case date to August 1979 when the buyers made an offer, on a PAR Standard Agreement, that was contingent on mortgage financing. The agreement stated “buyers shall make a completed application to a responsible mortgage lending institution for the mortgage loan…within ten days from the seller’s approval hereof.” Sound familiar? It is not too much different from what we presently find in the mortgage contingency clause.
The court found that the buyers made a good faith effort to obtain the mortgage, but were unable to do so by the commitment date of October 20. A few weeks later, the buyers wrote to the broker holding the deposit funds stating that their failure to secure the mortgage by the commitment date meant that the agreement was null and void and so they were entitled to a return of their deposit (does that sound like a notice of termination?).
The Superior Court held that the failure to obtain the commitment rendered the agreement null and void and the buyers were entitled to their deposit money. Indeed, there are differences between that Standard Agreement and the present version. That agreement provided that if the loan cannot be obtained, the agreement was null and void. That language is not found in the present version though it is clear that the sale is “contingent upon Buyer obtaining mortgage financing…” So what happens when a buyer cannot obtain mortgage financing? Is the buyer obligated to make an application to a different lending institution? I hear some you answering “yes” and others “no.”
The difficulty comes from language in the present Standard Agreement that provides that “Buyer must continue to make a good faith effort to obtain mortgage financing” if the commitment date has arrived and the seller has not terminated. Yes, buyer must continue to make a good faith effort but does that include making a mortgage application to yet another lender? I argue “no” given the plain language of the agreement that provides that the buyer is to make “a mortgage application.” That is the language found in Ormond and it would seem that the court recognized that the plain meaning of “a” to mean “one.”
If a buyer does not obtain a mortgage commitment by the commitment date, the buyer’s good faith effort is to do what is reasonably necessary follow up on the original application to hopefully make that loan available, assuming it is possible to do so. If additional information is required by the lender, it must be provided. However, when the buyer hits the end of the road, the buyer is not obligated to make an additional mortgage application to some other mortgage lender of buyer’s choosing or one selected by the seller or a broker or anyone else.
A similar issue has to do with the buyer’s choice of insurer. Assume that the buyer makes a mortgage application and is granted a commitment. The commitment will require that the buyer to obtain insurance by the date of closing for the protection of the lender and buyer. What happens when the buyer’s lender observes knob and tube wiring and requires that it be removed? This matter too is addressed in our Standard Agreement where it provides that if a “casualty insurer providing insurance required by the mortgage lender(s) requires repairs to the property…” the buyer may seek the repairs to be performed by the seller, and if the seller refuses to do so, buyer may terminate. What if the seller says that she will not repair but will find an insurer willing to insure the property? Is the buyer required to accept that insurer and proceed with purchase? Borrowing from Ormond it would appear that the plain language of the agreement does not require the buyer to seek a different type of policy or a policy issued by an insurer not selected by the buyer. Had that been intended, it would be included in the agreement in plain and clear language.
This is an area of great confusion. Be on the know and take advantage of the Hotline when issues arise. And, when a dispute arises having to do with the issues addressed here, or any other issue for that matter, do not hesitate for one moment to suggest that your client engage counsel. Doing so will assure that you don’t become my client!!!