WHERE IS THE “COMMIT” IN A COMMITMENT LETTER? by Paul Kuhn, Esq.

By definition, a mortgage commitment letter is a letter that confirms the willingness of a lender to lend to the borrower named in the letter. It also states the term of the mortgage and the interest rate.  However, in today’s financing world, everything is not always what it seems.  A typical commitment letter will likely have many conditional items that have to be resolved before it can truly be called “commitment”.  There is very little commitment in a commitment letter with conditions.  However, the Purchase and Sales Agreement in the State of Rhode Island could have certain pitfalls for buyers who rely on a commitment letter with conditions.

Let me explain.  In the mortgage contingency clause of the R.I. Association of Realtors Purchase and Sales Agreement it states “This Agreement is subject to Buyer obtaining a commitment letter issued by an institutional mortgage lender or mortgage broker on or before …… (a certain date).” It goes on to say in another section (a) “This Contingency is deemed satisfied once Buyer presents a commitment letter to the Seller or Listing Licensee in accordance with Section 18. Buyer assumes all obligations in fulfilling any and all conditions of the commitment letter.”  What does that mean?  What it means is that once the buyer gives the seller or his agent a copy of the commitment letter, whether it has conditions or not, the mortgage contingency is deemed satisfied.  In other words, the buyer now assumes all obligations in fulfilling the conditions of the commitment letter.  Note how that sentence is  bold in the agreement.

The question then becomes, what if the buyer is unable to fulfill one or more of the conditions rendering the commitment letter null and void and therefore the buyer is unable to close on the property.  Is the buyer’s deposit at risk?  Is the buyer vulnerable to being sued for “specific performance”?  Can the buyer be sued for damages to the seller? Remember once the seller has been provided with the commitment letter the mortgage contingency is deemed satisfied, so yes the buyer is at risk.

What is a buyer to do?  It would be best that until the buyer receives a “clean commitment letter”, which is one with no conditions or at least only conditions that are easily satisfied by the buyer and will not threaten the commitment letter, that the buyer requests an extension of the mortgage contingency clause until such a clean commitment letter can be secured from the lender.  This may not make the seller very happy, or his agent either, but best that everyone know where everyone stands and awaits a clean commitment rather than rely on a commitment letter with conditions that really take any real commitment out and then find out a couple of weeks before the scheduled closing that the transaction will not close.  Then everyone will be extremely angry.

A Purchase and Sales Agreement is a contact.  A contract with many clauses, important action dates, exceptions, etc.  Make sure you understand what you are entering.  Feel free to call our office to review your proposed Purchase and Sales Agreement so that you truly will understand what you are signing.

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