Yes, you typically get your earnest money back if your loan is denied, provided your purchase agreement includes a financing contingency clause, which makes the sale conditional on you securing a mortgage. If you don't have this clause, or if you're outside the contingency period, the seller might keep the deposit, so it's crucial to have that protection in your contract to get your funds back if financing falls through.
If the deal falls through due to a protected contingency (like a failed home inspection or financing issues), the buyer is generally entitled to a full refund of their earnest money. However, the process isn't always automatic: Both parties typically need to sign a release of earnest money form.
Your earnest money will stay in the escrow account until the home purchase transaction is complete or terminated.
Here are a few common scenarios when a buyer can usually expect to get their earnest money refunded:
First and foremost, if a loan application is denied and alternative financing for the car cannot be secured, the car must be returned to the dealership. In return, the dealership is obligated to refund the down payment, minus reasonable costs for the time the car was in possession, similar to a daily rental fee.
Once again, if you have a contingency in place that covers a loan falling through, you should get your earnest money back. But if the contingency isn't there, you'll lose that money.
Generally speaking, as long as a buyer has not waived contingencies and cancels the purchase and sale agreement before the due diligence/feasibility period has expired, the buyer is entitled to receive their earnest money back.
Earnest money gets forfeited to the seller if …
The buyer breaches the purchase contract and did not include a contingency (e.g. home inspection, financing, appraisal, etc.)
If they are unable to obtain such financing, they are within their legal rights to walk away from the offer. Therefore, a financing condition protects the buyer from losing out on their deposit or being sued, both of which have serious financial ramifications.
Breach of Contract Lawsuit: If all attempts at resolution fail, the buyer may choose to file a breach of contract lawsuit seeking damages, including the return of the earnest money deposit.
You may be able to get your earnest money back if you fail to qualify for a loan, depending on the terms of your contract. If you included a financing contingency in your offer to buy the home, you'll be able to get the money back. Without a financing contingency, the seller can keep the deposit.
Contract breaches
It's also unlikely for a buyer to get their earnest money back if they fail to meet the terms and conditions of their purchase contract. Common breaches of contract are failure to meet payment deadlines, delaying important paperwork, and backing out of a deal without a valid contingency.
Deadline: There is usually a set deadline for the buyer to obtain financing. If the buyer cannot secure a loan by this deadline, they can withdraw from the contract without facing penalties, such as forfeiting their earnest money deposit.
For a house priced at $500,000, this means you would need a minimum deposit of $100,000. This 20% deposit reduces the lender's risk and eliminates the need for LMI, which is an insurance policy that protects the lender if the borrower defaults on the loan.
Similarly, if you've included a financing contingency and your financing falls through because of appraisal or approval issues, you'll get your money back. However if you change your mind or back out of the deal for a reason not listed in the contingency, the seller may elect to keep your earnest money.
Getting everything in writing helps you protect your financial interests, so you and the seller should sign an earnest money contract before you pay any earnest money. The earnest money contract should outline the situations where the buyer gets to keep the earnest money and where the seller gets to keep it.
If the buyer finds an issue with the title, such as a lien or inconsistencies in ownership, the buyer can void the contract and take back the earnest money deposit.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
Risky spending habits
But frequent and large transactions to betting shops or gambling sites can be a major red flag. It suggests risky spending habits, which may raise concerns on whether you'll prioritise mortgage repayments.