Protecting Your Down Payment When Financing for a Residential Purchase Falls Through
When purchasers invest in a new home, they typically will need to make a down payment of as much as ten percent of the purchase price. This financial commitment often referred to as “earnest money” can be the subject of litigation when the purchaser is unable to secure proper financing. Although an artfully drafted real estate contract will contain a “mortgage contingency clause”, many parties to real estate contracts do not understand what happens when financing arrangements never materialize or collapse after a mortgage commitment has been obtained. Further, the precise terms of a financing contingency clause can vary significantly, so it is important to obtain legal advice about this issue.
When the terms of a Maryland real estate contract require the purchaser to make a down payment, the funds will be deposited and held in an escrow account. The purpose of earnest money is to serve as damages if the purchaser fails to move forward with the home purchase without legitimate justification. The mortgage contingency clause might permit a seller to cancel the real estate contract and recoup the down payment if the buyer cannot obtain financing.
However, litigation can arise over the return of the down payment when the buyer and seller disagree about whether the mortgage contingency clause is applicable. The seller might allege that the purchaser has not taken adequate steps to fulfill the buyer’s obligation to seek financing. Courts often get involved when disputes arise concerning the buyer intentionally using the mortgage contingency clause as a strategy to deal with “buyer’s remorse”.
A common example where purchasers are denied relief under a mortgage contingency clause involves the buyer requesting a greater amount of financing than indicated under the financing contingency of the real estate contract. Under Maryland, a home buyer who applies for financing that exceeds the mortgage contingency commits a breach of contract. Thus, a court will not order the seller to return the deposit to the buyer in this situation because the home purchaser will be deemed to have breached the real estate contract.
This type of example applies when the purchaser under a residential sale contract does not engage in diligent attempts to obtain financing. However, sometimes lenders fail to fund loans after the financial institution has granted a commitment to the buyer. While Maryland home buyers often can obtain the return of earnest money in this situation, the issue is not automatic. The court will consider evidence of bad faith by the purchaser which could prevent the return of earnest money.
When home purchasers that cannot consummate the transaction because of financing issues forfeit their down payment, the impact on their ability to buy a different home can be seriously affected. Financing contingency issues can be a trap for the unwary, so you should discuss your obligations under a financing contingency with your Prince Georges County, MD real estate attorney.
If you have questions about financing contingency clauses or other real estate transactional issues, our experienced Prince Georges County real estate lawyers at Georgette Miller and Associates P.C. can evaluate your situation and advise you regarding your options. Please feel free to contact us today at 866-964-6529 to learn how we can help