Home Buyers' Deposit Money at Risk
Home sales transactions are risky ventures for buyer and seller alike. But
how much are you willing to risk your earnest money, intrepid homebuyer?
Most home buyers assume that if their financing falls through, they can walk
away with their deposit money, no questions asked. Not so! And if more
states follow Colorado's standard home sales contract, you'd better think
twice before putting a deposit down on a home.
The deposit is designed to back up the buyer's good faith intentions with
cash. It signals to the seller that the contract offer is serious, and that
the buyer should be obtaining financing to go through with the purchase.
Under most circumstances, however, should something go wrong before closing,
despite the buyer's best efforts or intentions, the buyer typically gets the
All that would change in Colorado under a new standard contract form approved
by the Colorado Real Estate Commission. If a buyer's loan is approved but
later canceled by the lender for some reason prior to closing, the buyer is
considered in default. Kiss your deposit money goodbye. Not only that, the
seller has the right to sue you in court.
The problem, according to some real estate agents, is that home buyers won't
understand they could lose their earnest money for reasons beyond their
control, in a family emergency, for example. Or the mortgage lender could
arbitrarily decide to cancel the loan right before closing. That leaves the
homebuyer holding the bag with little time to obtain other financing. They
say the lending business is booming, and that means lenders may be too
anxious to issue preliminary loan approvals, only to reverse their decisions
Some mortgage lenders don't like all the stipulations in the new contract
form. A lender's loan commitment, according to the new form, means that the
lender has verified the buyer's employment, creditworthiness, and ability to
provide the necessary funds. But that may help the homebuyer, if it means
that the loan commitment is more solid. Perhaps it will force lenders to take
more precautions, and to educate the homebuyer about the process.
The Colorado Commission is trying to balance the rights of sellers, who can
get stuck when a buyer makes a frivolous offer, or pulls out of the deal for
flimsy reasons. The bottom line is, there always are risks for buyers and
sellers. Both have to look out for their own interests. The new sales
contract form becomes mandatory in Colorado on September 1, 1999.
Sources used in creating this article include writer Emily Narvaes and the