In the world of New York real estate, the “Mortgage Contingency Clause” is the buyer’s ultimate safety net. It says: “If I can’t get the loan, I get my deposit back.”
But what happens if the seller thinks you didn’t try hard enough? Or what if you applied for a “specialty” loan—like a reverse mortgage—and got denied? Can the seller keep your money?
A brand-new decision from the Appellate Division, Second Department (which covers King, Queens, Rockland, Westchester, and Orange Counties), just gave us a clear answer.
The Case: Berger v. Mazzarone (Oct 2024) Supreme Court, Appellate Division, Second Department, New York
In this case, a buyer entered into a contract to purchase a home and put down a significant deposit. The contract included a standard mortgage contingency. The buyer applied for a reverse mortgage, but the lender ultimately denied the application because the buyer’s “residual income” was too low for the credit requested.
The seller refused to return the deposit. Their argument? The seller claimed the buyer acted in bad faith by:
- Applying for a reverse mortgage instead of a “traditional” loan.
- Allegedly misrepresenting her income on the application.
The seller even won at the lower court level! But the buyer appealed, and the Second Department reversed the decision.
Why the Buyer Won
The Appellate Division ruled that the seller failed to prove the buyer did anything wrong. The court emphasized two critical legal principles that every buyer and seller in Monsey should know:
- The “Good Faith” Standard: As long as a buyer makes a “genuine effort” to secure financing, they are protected. The court found no evidence that the buyer intentionally tanked her application.
- The Contract Controls: If a seller wants to limit a buyer to a specific type of loan (like a 30-year fixed traditional mortgage), they must write that into the contract. Since the contract just said “mortgage,” the buyer was free to pursue a reverse mortgage in good faith.
What This Means for You
Whether you are buying a home in New City, Rockland County, Brooklyn, or selling a property in Suffern, this case offers three vital lessons:
- For Buyers: If your loan is denied, you are generally entitled to your deposit back as long as you were honest on your application and followed the contract timelines.
- For Sellers: You cannot arbitrarily decide that a buyer’s loan choice constitutes “bad faith.” If you want to restrict financing options, those restrictions must be negotiated into the Rider at the start.
- For Everyone: The Second Department is currently very protective of the “Good Faith” standard. Sellers who try to keep deposits based on technicalities may find themselves not only losing the deposit but paying the buyer’s legal fees as well.
The Takeaway: Don’t let a lender’s denial turn into a legal nightmare. At Balisok & Kaufman, PLLC, we specialize in drafting contracts that protect your equity—whether you’re at the closing table or the courtroom.