Expert: Todd C. Menard - 3/28/2008

Question
We have a contingency in our contract that depends upon us obtaining a construction loan (for a fixer upper) at a fixed rate of not more than 6.5% for a set amount. When we went to banks for the loan, they were unable to provide us a fixed rate construction loan or one that was 6.5% or less. We have the good faith estimates to prove this and got the first GFE within 5 business days as stated on our contract. We now are seeking to be released from the contract since we were unable to obtain a loan for the stipulation in the contract. The seller's listing company does not want to release us and is threatening us now because they say we never completed an application. How could we complete an application (sign and accept a loan) if we couldn't find a loan which offered us our terms stated on the contract? We did what we were supposed to do and now that we can't get the loan we wanted (which was on the contract) we want to be released. Any advice?

Answer
Hello Kelly - First, always go back to the wording in the contract. What do the terms of the contract say with regard to financing? Is there mention of your responsibility to complete a loan application? You are only responsible for performing according to the contingencies, terms and conditions set forth in the contract. If there is a contingency (an event that must take place before either party is held accountable to the terms of the contract) such as a finance contingency, then what are all the terms and conditions in the contract and on any addendum you signed with reference to the finance contingency? If the contingency does not spell out the terms with 'specificity' then they cannot hold you to 'specificity'. If the terms are general and you followed the general terms then you should be able to take advantage of the provisions in the contract? Now, If the contract offers a finance section, but the finance is not indicated as a contingency to the contract, then there may be no contingency at all. If this is the situation, when you signed the contract you agreed that in the event you could not obtain financing then you would not be entitled to a refund of your earnest money. Of course, you can't perform under the terms if you can't obtain finance... so you obviously would be released from the contract for failure to obtain finance. Again you will have to refer to your contract and addendums and read what conditions effect your earnest deposit. Just because you cannot obtain finance does not automatically mean you have the right to a refund of your earnest money. The next item of concern that takes the focus off your actions would be the actions and intent of the builder when you signed the contract. What I mean is, the market is slow and the new home builders are victims as well, as is the single homeowner, and the consumer needs to protect themselves from fraud. How? In this example, the builder/builder's representative allows you, an unrepresented buyer, to select terms of finance the builder's rep knows you can't obtain. Being an expert in their field they understand the contact very well yet fail to provide you with an understanding of the complete terms of finance and earnest money. Further, they do not allow you the opportunity to seek legal counsel prior to signing the document. Therefore, leading you into a contract they know you cannot fulfill. Using this scheme of allowing the unrepresented buyer to state/negotiate the terms of finance (that the builder knows are unable to be obtained) they premeditatedly write the contract knowing you can't perform and in a few days they will get your earnest money!! What a scam! If this is your scenario than you need to contact the Attorney Genral in your state ASAP to protect others form such predatory technique. So, in closing your request was 'can we be released' and the answer is they cannot make you fulfill the terms if you cannot obtain finance. But as I mentioned this, depending on the terms of the contract, may not mean you will have the right to a refund of your earnest money. Of course, the builder may have high integrity, as most do, and all you need to do is contact the builder corporate office directly and state your position. There is a strong possibility the builder may reward your efforts with a refund of yoru earnest money. Then again, maybe not. Please remember I am not an attorney and this is not to be construed as legal advice. This is real estate advice which should be recommended to you by any professional real estate consultant, preferably a member of the National Association of REALTORS. I hope this helps.