I couldn't get a mortgage: Can I get my earnest money back?

Check your purchase contract for contingencies and deadlines affecting whether inability to obtain a loan and close on the purchase also means losing your earnest money to the seller.

Question

We are set to close on a house in a week, but just found out that the lender has denied our application for a home loan. We kept submitting all the paperwork the lender requested and have been working very hard to keep our credit high. Even so, the lender said it’s simply going to be impossible to get us an affordable mortgage at this point, and we are going to have to back out of the home purchase. Are we going to lose our earnest money?

Answer

Whether you get your earnest money back is going to depend on the deadlines outlined in your purchase contract. Many contracts will have two applicable deadlines:

  • the deadline by which you had to submit an application for a loan to a lender, and
  • the deadline by which you must be certain that you can obtain a loan that you are comfortable with (also known as the loan contingency deadline).

The former deadline often comes at the beginning of the purchase process, while the latter is often the very last deadline prior to closing.

So long as you can demonstrate that you timely submitted an application to the lender (and it sounds from your question like you’ve been diligent about the application process), and so long as the loan contingency deadline hasn’t passed, you should be able to get your earnest money back.

Read the purchase contract carefully to find out how you need to notify the seller of your intent to back out of the contract because of the inability to secure a loan.

If, on the other hand, the loan contingency deadline has passed, you are at risk of losing your earnest money. At a point so close to closing, the seller has likely moved from the property or is in the process of doing so. The seller has suffered losses from having the property off the market for so long, and will have to restart the process of finding a buyer. For these reasons, most real estate purchase contracts will dictate that the seller now has the right to retain your earnest money.

However, all hope is not lost. Some real-life, practical advice: it can’t hurt to explain your situation to the seller and ask for a full or partial return of your earnest money. Too often parties to transactions forget that there is a real person on the other side. The seller may decide to let you have the earnest money back – you never know.

But do keep in mind that, past the loan contingency deadline, the seller IS likely entitled to keep the earnest money.

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