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When a buyer fails to obtain financing - who is entitled to the earnest money?

I entered into a contract with a buyer on April 28, 2014. (Texas)  They were applying for an FHA loan, and we did have a Third Part Financing Addendum for Credit Approval with a 14 day window to back out if they did not receive funding.  Our original closing date was May 27, 2014.  On or around May 27th, we were told that they needed to push out the closing.  We agreed, and signed an amendment to extend the closing date in paragraph 9 of our contract (TREC No 20-11) to June 13.  On June 9th we learned that the buyers were not approved for their loan by their mortgage company.  At that time, we considered the contract terminated and moved on to a backup offer on our property.  The buyers are now taking me to small claims court for the earnest money which I do not believe they are entitled to.  Are they?
  • June 17 2014 - Houston
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Answers (8)

It sounds like they extended the closing date on the amendment but didn't address the contingency of the financing.  If that is the case, the first date is still enforceable. 

However, as Realtors we cannot give you legal advice, you really need to seek counsel.

Good luck,

Naima
  • June 21 2014
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Profile picture for Galen Kurth
More than likely there is a financing contingency in the purchase agreement ,if so the buyer will get his earnest back if he could not get financing.
  • June 21 2014
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Profile picture for sunnyview
Most contracts have a buyer finance contingency. That means if the house does not appraise or they cannot obtain financing during the contract period the buyers get their earnest money back, so you may be keeping their money without a legal reason. Read your contract, but you may want to reconsider going to court and send your buyers their money back. 

Earnest money in most states is given like an engagement ring in contemplation of a legal union, but that means if you don't get married the ring goes back to the giver You can't legally keep it for spite, inconvenience or a delay that was unintentional.
  • June 19 2014
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In my state, the "loan contingency" is one of the safeguards for buyers. It is one that releases them from liability, should there be a problem with the loan. You will have to return that GF deposit if your contact is similar (and it probably is).
  • June 19 2014
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Profile picture for Hannah Tai Homes
Never assume anything in real estate! You should have everything in writing so that the situation is clearly understood and agreed upon by all parties. I cannot give you legal advice, but it does sound like the buyers are entitled to their earnest money deposit if they had a loan contingency in place and couldn't perform.
  • June 18 2014
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Profile picture for wetdawgs
If they had a financing contingency and did not release the financing contingency, then they are entitled to their earnest money back.  What does your agent say?  Save yourself the hassle of going to small claims court, give it to them.

Or, talk with your attorney.
  • June 17 2014
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Profile picture for Blue Nile
It sounds like they had a funding contingency in their offer that you agreed to, which would entitle them to their earnest money back if the contract is terminated for that reason.

Your agent is familiar with the contract and the contingencies; your agent should be explaining this to you.  If you are doing FSBO, you will need to do your own research regarding what is in the contract and what is not.

Unless there is something unusual in the contingency, the buyer is entitled to their earnest money back if the contract was terminated for the reason of the contingency within the contingency time frame.  The addendum signed likely extended the contingency period as well.
  • June 17 2014
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What you are really asking is a legal question, and any Realtor will advise you to speak with a lawyer about the particulars.  I am in the State of California, and we have a document here that is a "Notice To Perform", which is used when some part of the contract is not being met (i.e. loan contingency removal).  In most cases, if they buyer removed their loan contingency, or it has been past the default time period stated in the purchase contract and they did not perform their half of the contract, you could be be untitled to keep their deposit.  

Again, I would stress speaking with either a lawyer or a Realtor in the State of Texas who would be familiar with this type of situation.  It could be that the buyer paid the nominal filing fee for small claims in the hope that you would simply not want to deal with it and return their money.  

Good luck with the situation!
  • June 17 2014
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