If your contract has a Loan Contingency, you can usually cancel the purchase contract and get all your earnest money back if it turns out you can’t get the loan.
Unless you are paying all cash for a home, you should always make your offers contingent upon you being able to borrow the money needed to pay the seller for the home. This is the “Loan Contingency,” also called a “Financing Contingency.”
If a seller accepts your offer but it turns out later you can’t, in fact, get the mortgage loan you described in your offer, then you can usually cancel the contract and receive a full refund of your earnest money.
In addition, your lender is going to require you to pay for an appraisal of the home. If the lender’s appraiser says the home is worth less than the price in the contract, then you can usually cancel the contract and get your earnest money back as stated in your contract.
A common result, however, is that the seller will lower the price so the buyer won’t cancel the contract.
Canceling the Contract
Be aware, however, that when you cancel a contract you will not be reimbursed for any of the costs for inspections or appraisals.
Don’t miss the deadlines for canceling a contract when a loan contingency or an appraisal contingency is triggered, otherwise you may very well lose your earnest money.
Not Having the Down Payment is NOT a Contingency
The down payment amount you promised in the contract is NOT part of the loan contingency.
If your contract says your down payment will be $X but when it comes time to close you don’t have all the down payment money promised, that means the sale won’t be able to close and you could lose all of your earnest money.
Call me with your questions about this extremely important issue.
Don’t Do Anything Stupid
If you lose your job and can no longer qualify for a loan, you probably won’t have a problem canceling the contract and getting all of your earnest money back.
If, however, you can no longer qualify for a loan because you yourself did something stupid so you couldn’t get the loan – like taking out a loan to buy a new car or putting a lot of new furniture on credit cards – then the seller may be able to keep your earnest money.
Depending on your personal credit situation and your loan, be very careful about buying anything big on credit before the close of escrow because a big purchase could lower your credit score. Your lender will likely pull your credit score again right before the close of escrow and a lower credit score could possibly disqualify you from the loan they just spent 3 weeks getting you approved for or, worst case scenario, disqualify you from getting a loan at all. It all depends on your personal credit situation and your loan. Talk to your loan officer.
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