Buying Real Estate

How To Avoid: “I couldn’t get a loan AND I’m not getting my earnest money back?”

Earnest money is an important part of nearly all residential real estate contracts and not something buyers like to lose. Many brokers do not understand or thoroughly explain to their clients buying homes why earnest money may not be returned to a buyer if the buyer cannot obtain loan approval and thus cannot close.

Commonly, a buyer will agree in the Offer to Purchase contract to a “due diligence period” to secure financing, conduct inspections of the property, and inquire about any other important matters. Within this period that is established in the contract with a due diligence fee, the buyer may for any reason or no reason terminate the contract prior to the period’s expiration. And usually get their earnest money back. But not the due diligence fee.

If the “due diligence period” expires without the buyer having terminated and the buyer is then unable to close, the earnest money belongs to the seller. (As well as the due diligence fee.)

Summary:

  • Buyer Termination before the end of the due diligence period will yield return of earnest money, but not the due diligence fee.
  • Buyer Termination after the end of the due diligence period usually means neither earnest money nor due diligence fee are returned.
  • Upon Successful Closing – both due diligence fee and earnest money are generally returned as a credit to Buyer.

The “due diligence period” replaced a financing contingency in the Offer to Purchase form (developed by the North Carolina Association of REALTORS© and the North Carolina Bar Association) when it was revised in 2011. Brokers familiar with the older form may overlook or forget this change which, in effect, removed the ability to obtain financing as a contingency.  Now,  the standard contract clearly states getting the mortgage loan is NOT a condition of the contract.

Ideally, buyers should consult with their lender prior to signing the Offer to Purchase and be confident that the due diligence period will allow sufficient time. The buyer’s lender should provide feedback so that the buyer is comfortable in deciding whether to terminate or proceed with the transaction.

More info: http://bulletins.ncrec.gov/2016/05/

 

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