Appraisal Value Prevents Mortgage Financing

Added January 19, 2009 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: If you don't receive mortgage financing under the current terms of a contract, what can you do? Should you renegotiate or back out of the contract? The terms of your real estate contract may include provisions that will allow you different options.

Q: I recently applied for a mortgage but we were denied the mortgage for the amount we applied for. The lender told us the house didn't "appraise out."

Am I obligated to renegotiate the contract if the seller is willing to go to the lower price or can I exercise my option to cancel the contract as it is written now? Can the seller sue me if I don't buy the house? My contingency says if I can't get the mortgage by the particular date, which has already passed, either I or the seller can cancel the contract.

A: Many, but not all, real estate contracts include a provision allowing some time for a buyer to obtain financing for the purchase of a home. If within the time allotted a buyer is unable to obtain financing and the seller is notified, the contract is terminated and the buyer receives a full return of any deposit.

In this situation, the buyer doesn't lose any money and the seller has only lost the marketing time between the date of contract and the cancellation of the contract.

Usually, this right to terminate a contract if you are unable to obtain financing is called a mortgage contingency. But there are different types of mortgage contingencies. Some of these contingencies only provide that you can cancel the contract if your application is rejected while others specifically state that you have a right to terminate if you are unable to get a certain loan on certain terms.

In your case it may be an important distinction. If you are unable to get the loan amount you applied for because of the low appraisal, you should be able to terminate the contract. However, if you are able to obtain the financing you applied for even though the appraisal was lower than the purchase price, you may still have to buy the home at the original selling price.

You should consult a real estate attorney on these issues. Also, if you do have the right to terminate the contract and have notified the seller of your termination within the time provided, the seller may approach you and try to renegotiate the purchase price in order to sell the home.

At that point, it's up to you and the seller to agree on the new sales price. Once the contract has been terminated, you will have the right to demand the return of your earnest money.

Keep in mind that you must comply with each of the contract terms in order to terminate the contract and get your money back. If you renegotiate the purchase price with the seller, you will have to sign an amendment to the contract setting forth the new lower purchase price.

Published: May 07, 2004

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