Advice on paragraph of the FHA Financing Addendum I

[Gargi D.]

I was to purchase a condo in Washington DC this month. I had a pre-occupancy contract which expired the day before the FHA certification and financing. The contract ended as it was to be the settlement. The settlement was postponded to Middle of Oct 2013. Seller/agent did inform me of the right to retract my purchase contract. Well two days later I was informed that the financing was not granted as I have defaulted on credit card after signing the contract for purchase. Now the seller is saying they want all the Deposit because of this clause:

paragraph of the FHA Financing Addendum I :

"The FHA addendum states (4) Buyer will be in Default even if the Financing Contingency has not been removed if Settlement does not occur on Settlement Date as a result of any of the following actions by Buyer: (g) Does or fails to do any act following the Date of Ratification that prevents Buyer from completing Settlement."

My act was totally a slip. What does this mean? I will actually have to give up my Deposit even if this was totally unintentional?

[Jon Holdman]

I'm not sure I understand from your description exactly what happened here.

Most contracts have a financing contingency and a date when that expires. If you can't get financing before that date, you're entitled to get your earnest money (its not really a "deposit") back. After that date, you cannot back out because of financing issues. You should have your financing 100% lined up before that date.

You say you "defaulted on a credit card". What do you mean? Had a late payment? Had a 90 day late payment? Unintentional or not, missing payments on a credit card is a BIG issue. You must be 100% sure all credit cards get at least the minimum payment before the due date. Failure to do this can have serious consequences. Sometimes if you're just a day or two late you can convince the credit card company to not ding you. And one late payment won't result in notifications to the credit bureaus. Further, you usually have to be at least 30 days late before it shows up on your credit report as a "late". If you were really 30 days late while in the process of getting a mortgage, then, sorry, this may just be one of those lessons from the "school of hard knocks".

[Gargi D.]

Yes. Financing was denied as I defaulted. Do I forfeit my deposit based on the clause?

[Sweetie Medel]

Is this a standard contract for your state? Reading only what you included in your post, it seems anything you do that prevents you from closing would effectively override your financing contingency, and it's hard to believe a standard contract would be written so heavily against the buyer. I am in California, and of course our contracts are different. I am not an attorney, however, so please do not take this (or anything else on this board) as legal advice. Definitely ask your real estate agent what this clause means, and how it is typically applied in situations such as yours. Don't agree to give up your deposit until you've exhausted all options. Good luck!

[Gargi D.]

It does weigh heavily against the buyer it seems. agent is with the seller. Not sure it is a standard contract. Maybe an FHA clause?

[Jon Holdman]

Your very terse answers make it hard to understand what's going on.

Was the loan denied AFTER the last financing contingency deadline in your contract?

Did you have a financing contingency in the contract?

What do you mean by "defaulted" with respect to the credit card?

What does your real estate agent say about getting your earnest money back?

[Bill Gulley]

It appears to me that the loan commitment was made and due to acts of the borrower, failing to pay a debt as agreed, the lender pulled the financing under the terms. Since it is not closing as agreed due to borrower's lack of performance the earnest money is lost. An expensive lesson. A good loan officer will tell non-pro borrowers to keep up on all debts or stressing credit issues during the process. If you can get other financing you might see an attorney to see if you can still buy, you'd need proof to perform before you go there IMO. :)

[Gargi D.]

The Credit card payment was overlooked after the contract. Thus, the financing was denied due to bad credit. Since it happened after the ratification seller and agent states that based on the clause they want the release of the entire monies. Yes there was a financing contingency but then the below clause seems to override that clause.

"The FHA addendum states (4) Buyer will be in Default even if the Financing Contingency has not been removed if Settlement does not occur on Settlement Date as a result of any of the following actions by Buyer: (g) Does or fails to do any act following the Date of Ratification that prevents Buyer from completing Settlement."

[Dion DePaoli]

The clause posted only notes that there is a breach of contract when settlement does not happen on said closing date. Breaching the contract (or defining the breach) is not the same as an equitable remedy for said breach.

So, what I am saying is. This clause simply says if you do not close, you are in breach of the contract. The clause does not say how that is remedied. The clause does not call for a forfiet. Some other portion of the contract 'might' you would have to read it, but it seemily will be a contested situation.

The Seller can proclaim the contract has been breached however, you can also contest that claim. That will require interpleading the contract in court and a judge will decide what is equitable based on the contract, contingencies and what took place. Most Seller's will take a swing at keeping a deposit but once there is opposition they cave as nobody wants to spend legal fees to keep what is usually a small amount of money in comparison to the actual sale price.

I would write a letter to the Seller and release them from the contract and simply ask for your EMD back. Again, it is not specifically in the clause that "Buyer will lose Earnest Money Deposit", so they can't simply make that idea up, even though it seems like they want to believe it so.

Taking it to court, if it goes that far, you will want to have your correspondence with everyone in written form to present to the judge. He will look to a fair interpretation of the contract and terms and that will also include the consideration you delivered in "rent" while you pre-occupied.

Under that same idea, your pre-occupancy, the Seller really should want to play nice with you since, you could likely force them to run a full eviction just to make their lives difficult. (depending on how long you lived there)

[Wayne Brooks]

Yes, more details please. This is not an FHA addendum, sounds like a local realtor contract clause.

But from your originals post there is language that says.."even if the financing contingency has not been removed". This make it sound like your contract is contingent upon financing until you actually "remove it" by signing a document saying your financing is secure, and is no longer a contingency. If this is so, and you didn't "remove" the contingency, to should be okay. This is opposed to contract which states you must actually cancel a contract, if you can't get financing. Without all of the relevant contract language and addendums, it's hard to determine.

Also sounds like you're using the seller's agent, and don't have your own agent. You may need an attorney, but sit down with the broker. The broker can't just decide to give the deposit to the seller, or to you. If both parties don't agree, there will be a process to determine who gets the deposit, hopefully not just court.

The additional clause you quote seems overly severe, if it is to be applied to unintentional "does or fails to do". Would this clause apply of you had a car wreck, were upside down on your car loan, and the pay off out off depleted your cash....I think not.

[Dion DePaoli]

The point about missing a credit card payment as grounds for loan denial is not really that important. I would also stop making that some major point. It is really a "who cares" type of thing. What matters of consequence is your loans was denied. The reason of denial is moot.

[Gargi D.]

The listing agent is stating that they are not signing the release of EMD due to this clause:

Buyer will be in Default even if the Financing Contingency has not been removed if Settlement does not occur on Settlement Date as a result of any of the following actions by Buyer: (g) Does or fails to do any act following the Date of Ratification that prevents Buyer from completing Settlement."

So failing to pay the credit card dues is what caused the denial of the financing and thus the problem.

[J Scott]

I'm with the not-enough-info crowd...

That said, from my reading, it sounds like the FHA clause is basically saying, "Regardless of how long your financing contingency may be, if the contractual closing date comes and goes without a closing, the contingency period is over IN THE CASE THAT THE BUYER DOES SOMETHING (OR DOESN'T DO SOMETHING) -- AND THAT THING IS DONE AFTER THE CONTRACT IS IN PLACE -- TO KEEP SETTLEMENT FROM HAPPENING."

And in this case, your "defaulting" on a credit card is "doing something" that ultimately prevents settlement (and the fact that you did it after the contract is ratified is a key point). So, based on that interpretation, your missing the payment after the contract is ratified is actually core to the determination of whether you are in default or not.

Also, it looks like you're in MD, and if you're using the standard MD contract, remedy for default is forfeiture of EM. So, my take is that you are legally out your EM (though as Dion pointed out, you can try to fight it and might win).

[Wayne Brooks]

Gayatri, what specific contract form (form number/name, produced by who) are you using?

I just pulled up the MAR, Maryland Association of Realtors contract, and associated FHA addendum. The language you quote is not there, and paragraph 4 deals with an appraisal contingency. That contract also requires you notify seller within x days if you fail to get financing.

There is a Southern Maryland assoc. contract but I didn't pull that one up.

[Gargi D.]

The listing agent is stating that they are not signing the release of EMD due to this clause:

Buyer will be in Default even if the Financing Contingency has not been removed if Settlement does not occur on Settlement Date as a result of any of the following actions by Buyer: (g) Does or fails to do any act following the Date of Ratification that prevents Buyer from completing Settlement."

So failing to pay the credit card dues is what caused the denial of the financing and thus the problem.

Property is in DC.

[Gargi D.]

Wayne, the property is in DC and so is the agent and contract. I don't know all the details as I am actually helping out someone.

[Wayne Brooks]

advise the broker you will not sign the release either. If the release is not signed by both the seller and buyer, there are set dispute resolution procedures to be followed. Find out what those are. Speak to the agent's broker. Splitting the EM may be your best option, or speak to an attorney, depending on what you learn from the broker.

[J Scott]

Just keep in mind that from a purely ethical standpoint, it sounds like you violated the contract you willingly signed and the stated penalty is loss of your EM. While you can fight it (and you may even win), from an ethical standpoint, I would view that as fighting for money that you aren't entitled to.

But ethics are subjective, and that's just my opinion...I'm positive others would disagree...