Buying a house is one of the most significant financial decisions in a persons life. It often involves putting down a deposit as a show of good faith to the seller in a home sale that you are serious about purchasing the property. While most real estate transactions go smoothly, there are instances where buyers may not get their deposit back. In this blog post, we will explore the circumstances under which a buyer might lose their deposit and provide valuable tips on how to protect your investment. When is the earnest money refundable if at all? Is a good faith deposit or good faith money the same as earnest money? Without earnest money a buyer can back out of a deal, you have to show the seller youre serious to take their home off the market.
Putting down an earnest money deposit is a standard part of entering into a contract to purchase a home. This deposit shows the seller you are serious about buying the property. However, what happens if your mortgage application gets denied – do you lose the earnest money you already paid?
This is an important question for homebuyers to understand before committing funds. Let’s take a detailed look at the earnest money process and what recourse you have if financing falls through.
What is Earnest Money?
When you make an offer on a home that is accepted, you will be required to put down an earnest money deposit, typically 1-3% of the purchase price. This deposit is held in escrow until closing and goes toward your down payment and closing costs.
Earnest money shows the seller you are financially committed to purchasing the home It also provides the seller some recourse if the buyer backs out for no valid reason,
However, if certain contingencies in the purchase contract are not met, the buyer may have grounds to cancel the sale and get their earnest money refunded. One such contingency is securing financing.
The Mortgage Approval Process
Before house hunting, it’s wise to get pre-approved for a mortgage. This involves submitting financial documents so a lender can assess your creditworthiness and determine the size of loan you qualify for.
However, pre-approval is not a final loan approval. The lender will do further verification later in the process, including:
- Re-checking your credit score and history
- Verifying your employment, income and assets
- Having the home appraised to ensure its value supports the loan amount
If everything looks good, you will receive a final loan approval and clear to close. But it’s possible for the loan to be denied even if you were initially pre-approved.
Can You Get Earnest Money Back if Loan Denied?
If your mortgage application is ultimately denied, what happens to your earnest money? This depends on the contract terms.
If you included a financing contingency, the purchase agreement is dependent on you securing a mortgage loan. If financing falls through for any reason, the contract becomes void and you are entitled to get your full earnest money deposit back.
However, if your offer did not include a financing contingency, you likely forfeit the earnest money if your loan is denied. The deposit compensates the seller for taking the home off the market.
Tip: Always write a financing contingency into your purchase offer to protect your earnest money if loan approval is uncertain.
Reasons a Mortgage Can Be Denied After Pre-Approval
Why might your mortgage application get rejected even if you were pre-approved? Here are some common reasons:
-
Credit score drop – A significant decline in your credit score from new debts or missed payments. Lenders re-check right before closing.
-
Appraisal coming in low – If the home appraises for less than the purchase price, the lender may deny the requested loan amount.
-
Change in financial status – Job loss, bankruptcy, new collections, or insufficient income/assets can cause denials.
-
Failure to disclose material info – Not disclosing debts, properties owned, gift funds, etc can be seen as misrepresentation.
-
Failure to meet requirements – Missing documents, unsigned disclosures, or other issues can hold up approval.
How to Avoid Losing Your Earnest Money
Here are some tips to avoid earnest money loss if your home loan falls through:
-
Get pre-approved before house hunting so you know your price range and loan amount.
-
Include a financing contingency in your purchase offer to get your deposit back if loan denied.
-
Avoid taking on new debts or allowing your credit score to drop before closing.
-
Thoroughly disclose all financial obligations, income sources, assets, debts, and properties owned during the mortgage application process.
-
Respond promptly to lender requests for additional documents and information.
-
Maintain your current employment and income until after closing.
-
Keep sufficient funds in your account for the down payment, closing costs, and reserves required by the lender.
What to Do if Your Loan is Denied
If you receive notice that your mortgage application has been denied, don’t panic. You still have options:
-
Submit an appeal – Provide clarifying documents or request the lender re-evaluate.
-
Shop other lenders – See if another lender may approve you. Rates and standards vary.
-
Modify the purchase offer – The seller may agree to alter the price or terms to make financing work.
-
Coordinate with your real estate agent – They can help troubleshoot the financing issues.
-
Consult a real estate attorney – If your earnest money is at stake, legal guidance is wise.
The Bottom Line
Overall, make sure you take steps to protect your earnest money deposit in case of financing issues. Get pre-approved, include contingencies, and maintain your financial status. If your loan still falls through, act quickly to appeal, reapply, or terminate the contract. With prudence, you can minimize risks to your valuable deposit.
Failure to Meet Contingencies When Buying A House
Contingencies are essential clauses in a real estate contract that protect the buyers interests. These may include a home inspection contingency, financing contingency, or an appraisal contingency. If the buyer fails to meet any of these contingencies within the specified time frame, the seller could have the right to get the earnest money. For instance, if the home inspection reveals significant issues, and the buyer decides to back out, the seller may keep the deposit as compensation for taking the property off the market during the transaction. If the deal falls through a buyer may lose their earnest money deposit unless it can be proven that the seller was aware of the issues. In which case they might get their earnest money back.
Fraudulent or Misleading Information Could Lose Your Earnest Money
In the process of buying a house, the seller is obligated to provide accurate and truthful information about the property. This includes disclosing any known defects, issues, or material facts that could affect the buyers decision-making process. However, in some cases, sellers intentionally or unintentionally provide fraudulent or misleading information, leading the buyer to make a purchase based on false premises.
Instances of fraudulent or misleading information can include:
a. Concealing Property Defects: If the seller knows about significant defects in the property, such as structural issues, water damage, or termite infestations, but deliberately withholds this information from the buyer, it can be considered fraudulent. As a result, the buyer could end up facing unexpected repair or closing costs or safety hazards after purchasing the property. A buyer should get earnest money back
b. Misrepresenting Property Features: If the seller provides false information about the propertys features, such as the size, condition, or amenities, the buyer could be misled into believing they are getting more than what is actually offered.
c. Hiding Past Property Damage: Failure to disclose past incidents, such as floods, fires, or other damages that may impact the propertys value or safety, can be deceptive.
d. Falsifying Documentation: In some cases, sellers could forge documents related to the property, such as title deeds, inspection reports, or property records, to create a false impression of the propertys condition or ownership.
Impact on the Buyers Deposit:
If the buyer discovers fraudulent or misleading information after signing the purchase agreement but before closing the deal, they might have valid reasons to back out of the transaction. In such cases, the buyer can potentially request the return of their deposit.
However, the process of proving fraudulent intent or misleading information can be challenging, and it often involves legal complexities. Buyers must be diligent in conducting their due diligence before entering into the contract and consider taking the following steps to protect themselves:
- Hire a Home Inspector: Engage a reputable and licensed home inspector to conduct a thorough inspection of the property. This can help identify any hidden issues or defects that the seller might not have disclosed.
- Review Property History: Obtain a property history report that includes any past incidents, damages, or insurance claims filed for the property.
- Request Seller Disclosures: In many jurisdictions, sellers are required to provide specific disclosures about the propertys condition and any known defects. Request these disclosures in writing and ensure they are comprehensive and accurate.
- Work with a Real Estate Agent: A competent real estate agent can guide you through the buying process and help identify any red flags or inconsistencies in the information provided by the seller.
- Consult with Legal Counsel: If you suspect fraudulent or misleading information, consult with a real estate attorney who can review the documents and advise you on the best course of action.
Don’t Lose Your Earnest Money Deposit!
FAQ
Who keeps earnest money if financing falls through?
What happens to earnest money if you don’t get approved?
What happens to earnest money if offer is rejected?
Why do I lose earnest money?
Should you get your earnest money back if a loan falls through?
Once again, if you have a contingency in place that covers a loan falling through, you should get your earnest money back. But if the contingency isn’t there, you’ll lose that money. Jeanne Sager has strung words together for the New York Times, Vice, and more.
What happens if a buyer doesn’t get a loan?
When buyers sign a purchase agreement, they typically put up a certain amount of money to show their commitment to buying a property. Called earnest money, this amount is held in escrow so neither party can touch it until the purchase process is complete. But when a buyer isn’t approved for a loan, that earnest money is released.
Can I get my earnest money back if I back out?
If you back out of the contract for an approved contingency, you will get your earnest money back. You can expect your earnest money back if: The home doesn’t pass inspection. The home appraises below its sale price. You are unable to obtain a mortgage. The home has title search issues. You might not get your earnest money back if:
Should you put down earnest money before buying a home?
In highly competitive markets, it’s becoming more common for buyers to waive contract contingencies regarding real estate financing or an inspection. You might be tempted to do the same—a hefty earnest money deposit without contingencies will make you more attractive home buyers. But putting down earnest money also comes with serious risks.
Can I Keep my earnest money if my loan is short?
If neither option is possible and you must walk away from the deal, you may still be able to hang onto that earnest money if your financing contingency states you need a loan of a certain amount to buy the house. That way, if your loan amount falls short, you can cut your losses and keep your earnest money.
Do you get earnest money if a buyer drops out?
As a seller, be aware that you will not automatically get earnest money if a buyer drops out, but you might be entitled to it when a buyer is in breach of the terms of the contract and does not complete the purchase. Talk to a Real Estate attorney.