What Happens To Your Deposit Money in CT if You Can't Get a Loan on Time?

When a Buyer makes an offer to purchase a home, the offer is accompanied by an earnest money check, also commonly known as a down payment. 

In the State of Connecticut, typically a Buyer provides the Seller with a check for ten percent (10%) with the signing of the Contract and provides the remaining Ten percent (10%) at closing. The numbers are not set in stone but the more money offered as a down payment the more likely the Seller will accept an offer and the easier it is to be approved by a Lender for a Mortgage. 

The down payment is held in trust in the Seller's attorney IOLTA ( Trust ) Account.  In the Connecticut, if agreed to by the parties, this down payment may be released to the Sellers once the Buyer has obtained his/her Mortgage Approval. 

However, in the last 8 to 10 years, most Connecticut Bar Associations have written into their rules that the down payment funds can not be released until the time of closing.  In the State of New York, it is illegal for an attorney to release the down payment funds before the closing.
 
A question arises as to what happens if the Buyer does not get his/her Mortgage by the deadline.  If the Buyer does not get his/her Mortgage by the date stated in the Contract of Sale, the Buyer's attorney should ask for an extension to obtain the Mortgage Approval.  If the Buyer's attorney does not request that extension in writing, the Seller could be  entitled to the down payment if the transaction does not go forward. 

Also, if the Buyer backs out after signing the Contract, the seller may be entitled to the down payment.  Most Contracts have a liquidated damages clause, which allows the Seller to keep the down payment if the Buyer defaults.  If the Buyer does not qualify for the Mortgage and advises the Sellers in a timely fashion, the down payment is returned to the Seller.
 
However, it is not that easy for the Sellers.  If the Buyer had an extenuating cirmcumstance, i.e. - a death in the family, lost a job after entering contract, etc., the courts will look to these cirmcumstances and not allow a windfall to the Seller. 

Most courts will allow the Seller to be able to keep the difference to make him whole.  He can not reap a benefit from the default.
 
Every circumstance is different.  Keep an  eye on the dates in the Contracts, do everything in your power to meet your deadlines and if you cannot, ALWAYS request an extension in writing.  As a common courtesy most attorneys will allow for a one week extension and in the current mortgage environment more.

Article Submitted by Attorney Felicia B. Watson

FeliciaWatson@sbcglobal.net