Will the earnest money be forfeited if financing for the purchase is not secured?
Imagine the following case: a purchase of a property is signed, the buyer gives the seller an amount of 5,000 euros as a deposit and a resolutive condition is agreed in the deposit contract by virtue of which the seller must return the deposit if the buyer does not obtain financing for the purchase. What do you think happens to the deposit, do they have to be returned? In this article we analyse this case and a recent ruling on the subject.
What is a deposit contract?
The earnest money contract is a private document signed by buyer and seller in which the former gives the latter an amount of money (which acts as an advance payment of the price) to guarantee the sale. Generally, the contract establishes a deadline for signing the purchase contract and sets out the conditions of the future sale.
There are three types of earnest money: confirmatory earnest money, penal earnest money and penitential earnest money. The latter, regulated in article 1.454 of the Civil Code, are the most common and allow both parties to withdraw from the contract. If the buyer withdraws, he will lose the amount paid as earnest money, and if he withdraws, the seller must return the earnest money in double the amount paid as earnest money.
What happens if the buyer is not granted the mortgage?
It is common for the buyer to apply for a mortgage to purchase a home and, in this case, the question usually arises as to what happens if the buyer does not obtain the financing. In this situation, there are several options:
- If the deposit contract stipulates that if the buyer is refused the mortgage, the deposit will be returned: what has been agreed will be applied and the buyer will get his money back.
- If the earnest money contract does not regulate anything: the buyer will lose the earnest money if the financing is denied.
These are the general rules, but there are nuances:
- A judgement of the Provincial Court of Las Palmas of January 2023 understands that the seller is not obliged to return the earnest money to the buyers who had requested financing. In this case, the earnest money contract had included a resolutive condition according to which the contract could be terminated and the earnest money would be returned if the mortgage was not obtained, but the sellers requested a loan for more than 80% of the value of the property, and knew that this request could not be met by the bank, so the court ruled that the earnest money should not be returned.
- The Civil Code of Catalonia expressly regulates in article 621-49 the possibility of withdrawing from the penitential deposit contract if financing is not obtained:
- If the contract of sale provides for the financing of all or part of the price by a credit institution, the buyer, unless otherwise agreed, may withdraw from the contract if he provides documentary proof, within the agreed period, of the refusal of the designated institution to grant the financing or to accept the buyer’s subrogation in the mortgage encumbering the property, unless the refusal is due to the buyer’s negligence.
- Withdrawal by the buyer obliges the seller to return the price paid and, if applicable, the earnest money, and obliges the buyer to leave the seller in the same situation in which he would have been if the contract had not been concluded, without prejudice to the provisions of mortgage law.
As you have seen, it is necessary to analyse each case in order to know the consequences of signing the earnest money contract. If you need help with a sale and purchase, contact our team of expert advisors and they will guide you.
Noticias relacionadas
In recent months the Euribor rate has risen sharply. It is considered that, on average, mortgages have increased by around 300 euros and interest rates are likely to continue to rise. In this post, we analyse the different options you have to reduce the impact on your economy.
After the abolition of art. 28 of the Mortgage and Inheritance Law, which implies the transfer of the special protection of the legatee, the heirs will be free to sell the property or to constitute a mortgage as long as they have inherited it after the come into force of the new Law, that is to say, on September 3rd.
Noticias relacionadas
In recent months the Euribor rate has risen sharply. It is considered that, on average, mortgages have increased by around 300 euros and interest rates are likely to continue to rise. In this post, we analyse the different options you have to reduce the impact on your economy.
After the abolition of art. 28 of the Mortgage and Inheritance Law, which implies the transfer of the special protection of the legatee, the heirs will be free to sell the property or to constitute a mortgage as long as they have inherited it after the come into force of the new Law, that is to say, on September 3rd.
Noticias relacionadas
In recent months the Euribor rate has risen sharply. It is considered that, on average, mortgages have increased by around 300 euros and interest rates are likely to continue to rise. In this post, we analyse the different options you have to reduce the impact on your economy.
After the abolition of art. 28 of the Mortgage and Inheritance Law, which implies the transfer of the special protection of the legatee, the heirs will be free to sell the property or to constitute a mortgage as long as they have inherited it after the come into force of the new Law, that is to say, on September 3rd.
