Lawsuits or loopholes protect buyer deposits
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
This week a client told me that his realty agent warned him there are risks of losing his earnest money escrow deposit to the seller even after he removed his loan contingency. And, what could I do, as his loan officer to protect him? Great question!
A loan contingency protects the buyer from losing his or her deposit if the loan doesn’t get approved within 21 days of the deal’s acceptance. Remove the contingency, and the buyer either must complete the purchase or lose the deposit.
So first, consider what is at risk for buyers waiving their financing contingencies.
“Earnest money deposits are typically 3 percent of the sales price,” said Fullerton real estate attorney Jim Stearman. For example, on a $750,000 sales price, we are talking about $22,500, which is a boatload of hard earned savings.
Stearman pointed out that both the buyer and seller have to agree to the liquidated damages clause in the Residential Purchase Agreement or RPA before the buyers’ deposit could be at risk. Alternatively, protracted litigation is possible if both parties don’t agree to the liquidated damages.
The buyer would also have to waive the appraisal, property documents, title and inspection contingencies, not just the home loan clearance, which he refers to the “bright line test,” before possibly being at risk of losing his earnest money.
On top of all of that, there is a process of mediation, and possible arbitration or litigation if a dispute happens.
Here’s a short list of issues that could kill a deal even after you think your loan is fully approved:
1) Home owner’s association information that comes to light, such as newly disclosed threats of structural defect litigation by current owners.
2) Remainder of the down payment delivered to escrow from the buyer from a previously undisclosed bank account.
3) Internal Revenue Service cannot verify the tax returns authenticity because the address on the 4506-T verification form did not match exactly to the filed tax return address.
4) Property assessed clean energy property tax lien detected. Fannie and Freddie will not go behind these PACE liens.
5) Backup credit report shows buyer took out additional credit after loan approval, causing excessive debt ratios or credit score drops.
The average loan file has 500 pages of documents as a result of the post-crisis regulations. If your lender gets 490 of them right and 10 are wrong, your loan is not funding until those 10 pages get resolved. My advice is to add that “loan contingency until funding” language to the RPA for every buyer.
“Usually, they close, but it might not be pretty at the end,” said Kim Eachus, advisory escrow officer at Everest Escrow in Laguna Niguel.
Jeff Lazerson - Mortgage Columnist since 2011