A qualifying broker in Taos is representing a seller. A buyer's associate broker submits a purchase agreement that includes a contingency stating the sale is subject to the buyer obtaining financing within 21 days. On day 19, the buyer's lender denies the loan application due to the buyer's credit history. The buyer invokes the financing contingency and demands return of the earnest money. Under New Mexico contract principles, what is the most likely outcome?
Correct Answer
A) The buyer is entitled to a full refund of earnest money because the financing contingency was properly invoked within the specified period
A financing contingency protects the buyer by making the contract conditional on the buyer's ability to obtain financing within a specified period. When the lender denied the loan on day 19—within the 21-day contingency window—the buyer properly invoked the contingency. Under New Mexico contract law and NMREC rules governing trust accounts (NMAC Title 16, Chapter 61), the buyer is entitled to a full refund of earnest money when a valid contingency is exercised, because the condition precedent to the contract was not met through no fault of the buyer.
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Related Topics & Key Terms
Key Terms:
Related Concepts
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Equitable title is the buyer's interest in a property after a purchase contract is signed but before closing, giving the buyer the right to acquire legal title in the future. The seller retains legal title until the deed is delivered at closing.
A financing contingency makes the purchase contract conditional upon the buyer obtaining mortgage approval within a specified time period. If the buyer cannot secure financing, they can cancel the contract and receive their earnest money back.
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