Does the Loan Contingency Protect Your Earnest Money Through Closing?

Q: What happens to the buyer’s earnest money deposit if they are unable to obtain their loan after the Loan Contingency Deadline has passed? For example, what if the lender denies the loan shortly before closing or the buyer unexpectedly loses their job? Since these circumstances may be beyond the buyer’s control, isn’t their earnest money protected? Isn’t the transaction contingent on the buyer actually obtaining the loan by closing?

A:  Great question!  This is an important distinction to understand about the Loan Contingency.

The Loan Contingency protects the buyer during the Loan Contingency Period, not all the way through closing. The Sale Agreement does not make the transaction contingent on the buyer ultimately obtaining their loan by the closing date.

If the buyer is unable to obtain loan approval, they must exercise their rights under the Loan Contingency before the Loan Contingency Deadline expires. Once that deadline passes, the buyer no longer has the right to terminate under the Loan Contingency.

This applies even when the circumstances are beyond the buyer’s control. Whether the lender denies the loan shortly before closing, the buyer loses their job, or another unexpected issue prevents financing, the Loan Contingency does not provide continued protection after its deadline.

If the buyer cannot complete the purchase because financing falls through after the Loan Contingency Deadline, the Sale Agreement provides for forfeiture of the buyer’s earnest money deposit, subject to the Agreement’s applicable terms.

The key takeaway: The Loan Contingency Deadline is a critical contractual deadline, not simply a milestone in the financing process. Buyers and their agents should understand that the protection provided by this contingency does not automatically extend through closing.

All comments and responses from OREF or its staff, managers, and volunteers are non-legal opinions made for general purposes. Each Forms subscriber must rely solely upon their Principal broker or personal legal counsel for specific advice and instruction. You and your client should independently confirm that the Form(s) you use are legally suitable for the purposes intended and that they are current with respect to all laws and regulations.