Mortgages and Earnest Money
In today’s real estate market, more and more contracts tend to fall apart, often because the buyer is unable to procure a mortgage on satisfactory terms, if at all. As the lending market gets tougher, I hear the following questions a lot from buyers: “Is my earnest money protected? Can I get my earnest money back?” I also hear the inverse from Sellers: “Can I keep the earnest money?”
A standard real estate contract will set forth various contingencies that the parties must meet in order to close. One of these contingencies is the mortgage contingency. For a detailed explanation of what a mortgage contingency clause is, click here. To see how the mortgage contingency affects your earnest money, keep reading!
If the buyer is unable to procure a mortgage commitment stating that the lender’s various conditions have been met, and the buyer thus does not have a loan, then the buyer is entitled to a return of all earnest monies under a standard real estate contract (i.e. a realtor-form contract) if the contract had a mortgage contingency clause which protects the buyer and if the buyer notifies the seller that he has not obtained a loan within the mortgage contingency period. Each contract is different, but standard realtor forms for residential real estate in Illinois include such a mortgage contingency, and so long as the contingency is not crossed out when placing the offer, the dates and interest rates listed therein are key provisions in determining whether the buyer gets his earnest money back.
If the mortgage contingency states that the buyer is obtaining a loan for 80% of the purchase price for a 30-year fixed term with an interest rate not to exceed 6.5%, and the buyer is able to obtain such a loan, then technically the buyer is required to close, even if his interest rate might be a little bit higher than he wanted (i.e the buyer got an interest rate of 6.25% and he was hoping for 5.75%). Some contracts also allow the seller to find a loan for the buyer if the buyer is unable to obtain a loan on his own. In such instances, if a buyer’s loan is denied and he notifies the seller in a timely manner pursuant to the mortgage contingency in the contract, the seller will have an opportunity to search for a loan for the buyer, though seller need not do so. If the seller chooses to try and is also unable to get a loan for the buyer, then he must return the earnest money as per the terms of the contract.
Keep in mind that in certain situations, the earnest money terms may be different because they may have been negotiated by the parties’ attorneys as per their clients’ needs, and the contract might have been written by the attorneys, instead of using a form contract. This is true in some residential contracts, and in many commercial contracts. If you are concerned about what the earnest money provisions in your contract might be, you should have the contract carefully reviewed by your attorney.