Most people will obtain financing when purchasing their home, whether it’s a co-op, condominium or a one or two-family home. In such a case the contract of sale will contain a provision making the sale contingent on the purchaser obtaining a loan in a certain amount. If the purchaser is turned down by the lending institution they can cancel the contract and receive the return of their down payment.
In order to obtain the protection afforded by this clause the buyer must strictly adhere to it’s provisions, i.e., they must only apply for a loan in the amount stated in the clause (or a lesser amount); they must make a “good faith” application to a lending institution and they must abide by the time frame given to obtain such a loan.
In answer to the question I pose, if a buyer applies for a loan greater than the amount set forth in the clause and is then denied a loan, they will have forfeited the protection afforded by the clause and will not be able to cancel the contract. If they have no alternative source of funds to consummate the purchase they will be in default under the terms of the contract and more than likely lose their down payment.
Of course, if the buyer is approved for a loan greater than set forth in the contract, no harm, no foul. I, however, would never advise a client to take such a risk as there may be reasons beyond their control that may result in a loan denial. For instance, when determining whether to approve a loan to purchase a cooperative apartment or condominium unit, the lender will review the condo and co-op project as well as the buyer’s creditworthiness. While the buyer may have sufficient income and sterling credit, they may still be denied a loan based on the condominium’s or cooperative apartment corporation’s financial situation.
The loan contingency in a contract to purchase your home affords protection against your being denied a loan. Make sure you retain an experienced real estate attorney who will make sure you comply with its provisions so as not to jeopardize your substantial down payment.