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 money back.

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 later.

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 Denver Post.