Can I loose my Initial deposit if my loan doesn't close?

23 Replies

Let's say I remove all my contingencies. My lender tells me we are ready to rock & roll.

Then something unexpected happens. I loose my job, my credit score dips, or my lender denies my loan for some other reason.

Do I loose my initial deposit, or is the seller required to show "damages" to claim it? Can I make a case to the escrow company that I acted in good faith and still get it back?

Thanks,

Matt,

EVERY contract is DIFFERENT.What's in your contract??

That will spell out what happens to any deposits and earnest money and provisions and protections built in.

If you do not understand specific language in a contract or what will happen then you should not sign it until you do.

Sadly everyone gets into a contract and then does damage control later on.Saying to a judge in court "I didn't understand what I signed your honor" will not fly.They will come back to you doing your own due diligence and if you didn't sign you wouldn't be in this positions.

Also make sure you are not confusing earnest money with lender fees required upfront to fund a loan.Those are generally non-refundable but again review all docs you signed.

If a real estate broker/agent was not involved in the contract do not expect them to give legal advice.Some nice attorneys might let you e-mail a copy of the contract to them and spend a few minutes on the phone with you.If you need something deeper than that expect to shell out some coin.

Joel,

Here's what my contract says;

"LIQUIDATED DAMAGES: If Buyer fails to complete this purchase because of Buyers default, Seller shall retain, as liquidated damages, the deposit actually paid...Release of funds will require mutual, Signed release instructions from both Buyer and Seller, juducual decision or arbitration award."

So assuming "buyers default" can be interpreted as just about any reason for not closing, it sounds like the only recourse would be not to sign the release, and it would go to arbitration?

Is "buyers default" or "default" defined in the contract?

Any why would you remove a financing contingency if you need a loan?

Usually it's an either or.So one should be checked if there is a dispute over the earnest money.

If both parties do not agree to the reasoning of the escrow company holding the money and how they want to dispurse then in the contract go to a mediator or go to court should have been checked.

Hard to say without the full contract to review what the remedies are.In any case you will need legal to look at it.

How much money are we talking here??

No legal advice

Most contracts have a "loan commitment deadline". May have a different name, but the idea is there is some deadline for getting your loan approved. If that date passes and your loan falls through, then you cannot get your EM back based on the loan falling through. There could still be other contingencies that would give you an out.

"Liquidated damages" is good. The alternative is "specific performance". That give the sellers the right to sue you for any damages they have as a result of your failure to buy.

If you have your purchase agreement handy which you should. Then look in the area of H3 which should be like the 3rd or 4th page. Under this it says Loan Contingency Removal. It says you have 17 days to remove the contingencies or cancel the agreement. If you remove the contingencies and you don't get the loan then yes you lose your deposit because at the time you remove it, the deposit becomes liquidated damages. There is a box under this that could be checked that says "the loan contingency shall remain in effect until the designated loans are funded". Since you removed the contingencies I'm sure the box was not checked. Agents usually check it by default when doing a purchase agreement in case the selling agent does not catch it. The reason they give 17 days is that it is sufficient enough time albeit barely and because people tend to by nature procrastinate and could and would hold up a closing for months.

While others don't seem to want to say it (since technically the contract *could* indicate otherwise and people here don't want to give legal advice), it's probably pretty safe to say that yes, if you remove all contingencies and then don't close the deal -- for whatever reason -- you *will* lose your earnest money.

Again, this could be some edge case where that's not true, but most likely that's the case...

As others, I have to start by saying I am not giving any type of legal advice here.

I assume you used the California CAR (California Association of Realtors) Purchase Agreement and Joint Escrow Instructions form, right? I think it is form RPA-CA which is what is commonly used in CA for purchases of residental property. If so, there is a Loan Contingency Removal on the first page, and I assume it was checked, right? And there was an amount of days on the first page under Loan Contingecy Removal. If you are over that amount of days than it usually states something that the seller may be entitled to the buyer's deposit. In additon many times we in CA are asked to sign a contigency removal document in escrow after all dates have expired. Did you sign anything after a few weeks removing all contingencies?

This would be something to talk to a lawyer about. No matter what, you can always ask for the deposit back and see what happens. Are you represented by an agent on the deal? Have you discussed with him/her?

This is really a contract issue and something you would want legal counsel for if you cannot get the deposit back. These contracts often have all kinds of things written into them as addendums, etc. and its very hard to answer a question like this with limited information.

I hope this was helpful in some way. Good Luck on it.

Joe M I think you nailed it.

Section 3.H.3.ii
"the loan contingency shall remain in effect until the designated loans are funded."

I think I just need to tell my agent (representing both sides) to check this box. That should cover my *** just in case.

Thanks!

So the situation you posted was truly hypothetical, and not some predicament that you are already stuck in?

Exactly. Trying to predict worst case scenario

Sorry Matt, I thought you had already signed the contract and were in escrow. You are on the right track with what Joe M said. Always have an "out" on these things, especially now a days with how difficult loans are to get. Having the loan contingency in effect until the designated loans are funded is the way to go. I would be afraid to buy anything financed these days without something like it.

Thank god for you guys and this forum

The only thing though Matt is that if it is an REO property then the banks will not accept that box being checked because as I said people could in theory drag an escrow out for a long time. Not likely it would go through otherwise either unless the selling agent misses it. Your best bet would be to write in a higher amount of days than the set 17 days that it has on the purchase agreement. However, in now days market especially in the market we are in which is the same, there are so many bids on homes because there is a lack of inventory that they will look to someone who would not look to drag out an escrow. Also, someone said that you would lose the money if you did not close. The thing is if your loan falls through and you try to get alternate financing then the seller has no obligation to cooperate and if your contingencies are taken away at that point then you in theory could still be screwed even if you were able to secure a different kind of loan.

Technically you're deposit is forfeited but as a practical matter it is VERY TOUGH for the seller to get your money in california.

Can you elaborate on that Curtis?

I'm not Curtis, but I'll elaborate. I've kept earnest money exactly twice. And exactly twice there was no way for me to keep it without the non-performing buyer agreeing to it and signing docs that said they agreed to give it up. Escrow companies in CA are not in the business of getting wrapped up in law suits. No matter what your contract says, they will not release the EM funds to the seller unless the non-performing buyer agrees to it.

Good to know, huh? You think your contract is all binding and such, and maybe it is. You think escrow is there to follow the mandates in the written agreements. Hmm, not really. YOU can sue the buyer for non-performance or YOU can come to a settlement agreement regarding the EM. But escrow is not interested in doing anything that would get them named in a suit, so they do nothing. The vast majority of Escrow Companies in CA are providing escrow services only in order to to write your title policy.

The majority of EM disputes in CA are settled between the parties involved. Do not expect escrow to help you here. Unless you are the non-performing buyer, in which case they won't come to your rescue, but they won't give your money to the seller either. :)

very nicely said

So, what exactly happens in California when a buyer refuses to sign the termination and release of earnest money to seller? Clearly, the seller isn't going to sign anything to relinquish the money to the buyer, so what happens? If it's forced to go to arbitration or in front of a judge, wouldn't the seller end up being awarded the money?

Or does it just sit in escrow forever (clearly not the case, but not sure the alternative that doesn't end well for the seller)?

J Scott it is very tough to keep deposits in California.

Option 1 - Work our a compromise with Buyer/Agent usually keep a portion of the deposit and give some back. This is what I end up doing most of the time.

Option 2 - Open a second escrow with a new escrow company that doesn't know about the other deposit. Have them close the new deal while you work out arbitration with the previous buyer (which you probably will win). Hopefully the buyer or agent don't file a lis pendens on the property.

The best way I have found to handle it is, when the Buyer starts to get flaky threaten to kick them out of escrow or have escrow draw an addendum that they will release the deposit on with no further signatures required. If escrow draws it and makes the wording they are comfortable with and the Buyer signs it they will release the deposit a lot easier.

Well Scott in the purchase agreement it is decided upon whether any dispute between buyer and seller will have a final say in arbitration or be able to take it to court. If it is taken to arbitration or court, they will go strictly according to the contract so if the buyer defaulted yes he would lose the deposit. I rarely like signing away any rights for any reason or idea however I think that signing for arbitration as the final say in these matter is best for everyone really. It's faster, cheaper and usually pretty much the same decision. As far as the escrow company, they only follow the instructions in the agreement and they can release no funds until both buyer and seller agree. Escrow is not something that takes sides, it is a very nuetral thing that is a benefit for both the buyer and seller and can only do what it is told, it can't act.

Old post but... 

What happens if financing contingency has passed, but you have documentation saying the seller will turn over the property with 1 of 3 units vacant, and they don't? Are you able to back out and get your EM back?

Originally posted by @Robert P. :

Old post but... 

What happens if financing contingency has passed, but you have documentation saying the seller will turn over the property with 1 of 3 units vacant, and they don't? Are you able to back out and get your EM back?

It depends on what the contract says is the remediation for the seller not performing.  Generally speaking, if the seller can't satisfy the contract, you have grounds to terminate...but the details will be contained in the contract.

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