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Roger, Lawyer
Category: Real Estate Law
Satisfied Customers: 31560
Experience:  BV Rated by Martindale-Hubbell; SuperLawyer rating by Thompson-Reuters
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I recently entered into a contract with a homebuilder ...

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I recently entered into a contract with a homebuilder to construct a new home and deposited $1000.00 in earnest money. I applied for a mortgage with two different lenders, including the builder''s own in-house lender and was denied a loan for the home. The builder will not relingquish me from the contract and says that I owe them an additional $2500.00, although nothing has been done. I have not even came to a final price for the home, but cannot get loan approval on the base price. Is this legal? Thank You

You need to take a look at the contract to determine what your obligations to the builder are. The contract terms are going to govern. Usually, a real estate construction contract states that the contract is contingent upon the buyer securing financing. However, if the contract was written by the builder, it may not have that general language. Also, there may be a clause in the contract that states if financing fails, or if the contract is otherwise breached, the builder is entitled to liquidated damages, i.e. the $2,500.00.

The law allows people to contract on any terms, so long as they are not illegal. However, if the contract was written by the contractor, and unilateral in nature (meaning that the contractor had all of the bargining power), and some of the terms are unconscionable (no one in their right mind would agree to the terms), you may have some grounds to challenge the validity of the contract.

However, you are obligated to read a contract before you sign it, and if you fail to do so, you proceed at your own peril.

The best advice I can give you is to review the contract and see if you can find any statements regarding damages the contractor is entitled to if a breach occurs. If the language is not in there, then the contractor will have a hard time arguing it is entitled to the money. If it is in there, the next thing is to consider whether you have any options to get out from under the contract. I would suggest hiring an attorney to review the contract with you if things go this far.

Please feel free to ask any follow-ups.

Customer: replied 9 years ago.
Reply to Adam Kirk's Post: We are willing to forfeit the earnest money plus the additional $2500.00, my question is if we cannot get approved for financing how can the builder hold us to the contract if we cannot obtain financing (the money) to pay for the home? We are not concerned with retaining the earnest money, we simply want out of the contract because we can't get a loan. There is a clause in the contract that states that start of construction will not start until certain conditions are met and one being "obtaining favorable commitment." Thanks

I don't think that the builder can hold you to the contract. One of two things have happened: (1) you've breached the contract by failing to obtain financing and you have to forfeit the money, or (2) the contract is contingent on you obtaining financing, and since you can't get the money, the contract is void - the only damages would be losing the earnest money.

I would suggest writing a letter to the contractor and inform it formally that you cannot obtain financing, and therefore, you cannot meet the terms of the contract. If you do this and it builds the house anyway, then I don't believe you would be held responsible. This is so because any creditor has a duty to mitigate (limit or reduce) its damages. If its damages are $2500 now, then they will be acting in bad faith by moving forward with the construction, which will obviously increase the amount of money and time they've invested. I can't imagine a court holding you responsible for anything other that what the contract calls for in the event that financing is not obtained.

I hope this helps. If something is not clear, ask additional questions. Thanks.

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