One of the biggest areas of concern for buyers of real estate is losing out on their earnest money deposit.

If something goes awry in this transaction and it turns out that my loan application doesn’t get approved, how can I be sure I’ll get my deposit back?

Since many of my friends and colleagues are Realtors, I am often asked if there is anything I can do as a mortgage broker to help ensure that the earnest money deposits made by their buyers are protected. One of the best strategies for protecting a buyer from losing his or her deposit is to simply add a loan contingency.

When a contingency is added to the paperwork associated with the loan, it allows the buyer to avoid losing their earnest money deposit if something happens and the deal doesn’t get approved within 21 days of acceptance of the offer. Once the contingency is removed, the buyer has to either complete the deal or forfeit the earnest money deposit, as it is with any purchase transaction.

Considering most earnest money deposits are a minimum of around $1,000 and they can go up to three percent of the purchase price or higher, based on the buyer’s preference, it’s easy to see why someone could have a bit of anxiety about losing out on it if the deal falls through.

The additional paperwork and regulations imposed on lenders as a result of the financial crises only strengthens the point in regards to the advantage of adding a loan contingency. An average loan file now contains approximately 500 pages. If the lender accurately checks every box, crosses every ‘T’ and dots every ‘i’ on 499 pages but misses one, then the loan will not get approved until the issue is corrected. 

This could potentially cause the deal to fall apart and the buyer to forfeit his or her earnest money deposit.

Additionally, there are numerous other speed bumps that could derail a transaction, even after everything starts to look good and it seems like the loan will be approved:

• Previously undisclosed bank accounts - If a portion of the down payment arrives at the attorney’s office from a source that was previously unknown, it could throw a wrench into the transaction.
• Discrepancy with taxpayer addresses - If the good folks over at the IRS are unable to verify the authenticity of a taxpayer’s return, since the address on the 4506-T didn’t exactly match the address on file, the deal could crumble.
• Too many new credit applications - If a buyer takes out new lines of credit after the loan is approved and it reduces the credit score or causes excessive debt ratios, the possibility of the deal closing successfully could be obliterated.
• Mismanaged or shady HOAs - If new information about a Homeowner’s Association is unearthed, especially something related to pending structural defect litigation brought forth by the current owners, the deal could break apart.
• Property tax lien detected - Especially if it is a property-assessed clean energy property tax lien, it could be problematic to the deal. Fannie Mae and Freddie Mac will not approve a loan if this type of lien exists.