Home Buyer Loses Earnest Money When Closing Fails

Added September 5, 2007 by Ilyce R. Glink

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Summary: When financing falls through for a mortgage, the seller wants to keep the buyer's earnest money. The buyer withdrew from the home buying contract but now the seller's attorney says the buyer can't get her earnest money back. Keeping the earnest money will compensate the seller for taking the property off the market while the financing was pending.

Q: We found a house we wanted to buy and put down $2,500 in earnest money on the property. We wanted to close on August 27.

The problem is that now we can't close because according to the lender we don't have enough funds.

The commitment letter clearly stated we needed $15,000 in gift funds to close. At the time of loan application, my parents promised to give to us this money but now, due to unavoidable circumstances, they can't.

We withdrew from our contract but now the sellers' lawyer is refusing to give us our earnest money back, citing bad faith.

Is there anything we can do to get our cash back? Our current attorney is not handling this matter the way we would have liked.

A: It isn't the seller's fault that you entered into a contract, promised you would close on a specific date and now, due to a financial problem your parents are having, cannot close on the property.

It's tough to say this, but you should have made sure that you had the funds you needed to close on the property.

Now that you don't, you want the seller to give you the earnest money back. But that earnest money was his security that you were going to go through with the deal. He has taken the property off the market while you tried to scrape together the funds for closing. He has lost out on possible buyer interest and may wind up with less money because of your actions.

I don't know what your contract says, but it's entirely possible that the seller is entitled to keep your earnest money check as compensation for you canceling the deal. To get the funds back, you'll have to sue, which, may cost more than $2,500.

For more details, please talk to a real estate attorney or a litigator.

Sept. 5, 2007.

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