Home Buyer May Lose Earnest Money

Added August 12, 2005 by Ilyce R. Glink

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Summary: What happens to your earnest money when you decide not to buy a home? Can the seller keep the earnest money? What are some of the grounds in a contract whereby you can cancel and get your earnest money back? If your contract requires a certain type of financing and that falls through can you cancel your home contract and keep your earnest money?

Q: My husband and I have a contract to buy a property in South Carolina that is contingent on obtaining conventional financing. This is a checked box on the contract with no other stipulations.

For personal reasons we have decided not to relocate and do not want to purchase this house. We got a vague preapproval letter from a lender and ultimately were going to have a first mortgage for $350,000 and a second mortgage for an additional $175,000 that we planned on paying off as soon as we sold our current home. But I also have received two denials from mortgage lenders based on our inability to qualify for a "conventional mortgage".

The sellers feel they are entitled to our $5,000 earnest money and we believe the contingency is very clear and we should get the money returned to us.

What do you think? I don't want to waste anybody's time if we are wrong.

A: I'm not a real estate attorney and I do think you should speak to one about your case.

But from where I sit, you were approved for a loan (the "vague preapproval letter" that you spoke of). You were also denied a loan. Did this all happen within the contingency period?

If the "preapproval letter" was actually a prequalification letter (in other words, you hadn't actually applied for a loan at that point) but you then applied for, and were turned down for, the second and third loans, and it all happened within the time constraints laid out in the offer to purchase, then you might have the right to get your earnest money back.

Otherwise, I think you're out of luck. Earnest money is also known as a "good faith deposit" and home buyers put it down to show the seller that they're really serious about buying the property. Because of your earnest money, the seller takes the property off the market, possibly excluding someone else who might have made a better offer.

You can't just decide on a whim (even if those are good and personal reasons) to back out of a deal. You signed a contract. That's why the seller feels he is entitled to some or all of your earnest money.

Please talk to a local real estate attorney to figure out what your best options are and to determine whether under the terms of the contract you are entitled to terminate the contract and get your money back.

Aug. 12, 2005.

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