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Part 2 – Closing day headaches: What to do when things go wrong?

 
Part 2 – Closing Day Headaches

While most real estate transactions close on time without any issues, there are those rare instances when things pop up on or before the closing date that can be quite stressful to both homebuyers and to sellers.

In part two of this three part series, we will identify a common instance and how the situation can play out.

Fact Situation 2  - The buyer does not have funds to close

In most instances, a Homebuyer will have made the offer to purchase a home "conditional" upon the obtaining of satisfactory mortgage financing. If a Buyer has been "Pre-Qualified" or "Pre-Approved" for the mortgage before entering into the agreement, he/she would still have to obtain a formal mortgage approval after the agreement was signed and presented to his bank. This formal process may require a Buyer to provide satisfactory evidence of down payment and valid proof of employment, or for the lender to obtain a satisfactory appraisal or a number of other requirements.

 It is very dangerous for a Buyer to waive the financing condition on the strength of simply a pre-approved mortgage or where the lender has provided the Buyer with a written "conditional" mortgage approval. In these days of heightened mortgage regulations, we are seeing greater instances of deals not closing on time (or at all) due to this fatal oversight. I always recommend to my clients that they not waive the financing condition until they have a firm, unconditional mortgage commitment in their hands. Unfortunately, that is not always feasible. In many cases, what was a routine approval process can go side-ways at the last minute when the appraisal comes in too low, or when a Buyer is self-employed and the lender discovers discrepancies with reported income.

In those cases where a Buyer has waived the financing condition and then learns that the lender is not able or willing to grant the mortgage, several scenarios can play out. In some cases the Buyer may able to secure financing from an alternative "B mortgage lender" at typically a higher interest rate. Perhaps a parent or sibling may be willing to co-sign the mortgage in order to satisfy a lender's concern. Or perhaps the Buyer simply needs an extension of the closing date in order to line up the financing. If an extension is required, the realtors or lawyers will often negotiate specific terms for the granting of such an extension.

In the rare instance where a Buyer is not able to complete the transaction by the scheduled (or even the extended closing date), a breach of contract is said to occur. The Buyer will automatically forfeit the deposit money to the Seller. However, in practical terms, it may be difficult to have the Real Estate Brokerage that is holding the deposit to release it to the Buyer. Typically the brokerage will only do so with the written consent of both parties or the obtaining a Court Order directing it to do so. The law is quite settled however that the Buyer will lose his deposit if he has breached the agreement, even if the home later sells to another buyer for a purchase price that is equal to or higher than the original price.

The Seller's lawyer must properly follow certain technical steps in order to ensure that a Seller will be able to recover this deposit through a process called "tendering." In addition, the Seller will be able to sue the Buyer for all additional damages that are suffered as a result of the breach. This process will often result in court litigation between the parties.

As for the Seller, there is a legal requirement that he/she "mitigate" the damages that can be claimed by re-listing the property for sale immediately and to sell the property as soon as possible. This may even require that the Seller reduce the asking price after a reasonable period of time. 

 
Real Estate LawMark Habib