Home purchase canceled over loan denial

We are selling our home, and the buyer just canceled the contract stating he was denied for a mortgage loan. Do we have to give the deposit back?

When a seller and buyer agree on the terms of a home sale, those terms are binding. The buyer puts up a money deposit, and if that buyer later breaks the contract, the seller keeps that deposit. The deposit represents an agreed amount to the seller to compensate for the time and expenses of going through with the failed attempt.

Because there are so many unknowns for a buyer going into a purchase, the contract allows for certain “contingencies” that enable the buyer to cancel the contract. The two most common relate to the property’s condition, allowing a certain amount of time for inspections, and the buyer’s ability to get a loan approved, again, within a certain time frame.

If the contract contains these contingencies and the property is in unexpectedly poor condition, or the buyer cannot get approved for a loan, despite diligent efforts to do so, the deposit will have to be returned.

You need to carefully read the financing section of your contract to see what the deadline was and what the buyer was required to do. You also need to find out why the buyer’s loan was denied. If the buyer was denied despite his best efforts and notified you by the deadline for doing so, you need to return the deposit. However, if the deadline was missed, or if it appears the denial was manufactured, you will have a claim for the money.