How to retrieve deposit after mortgage is denied


November 15, 1998

Dear Mr. Azrael:

In August I signed an agreement to purchase a co-op apartment. Both a seller's agent and a buyer's agent were used, and the agreement included a mortgage contingency.

I was told by the seller's agent that only one bank in the Washington/Baltimore area finances co-ops, so I applied to that bank for financing.

In the meantime, my employment became very tenuous (a major downsizing occurred). Also, (I'm not sure why) my employer did not return the bank's verification of employment forms.

The bank told me they had not received the forms, and I told them that my job was in jeopardy.

They denied my mortgage application.

I sent the bank's denial form to the seller and his agent. The seller refused to return my ($1,000) deposit, claiming he purchased another property on the strength of my contract with him (even though the contingency had not been satisfied).

I assumed my deposit would be returned. But the seller's real estate agent told me that they cannot return my deposit without the buyer's agreement, which he will not give, and that my deposit could be in limbo for years to come. Can you please tell me what recourse I have.

To sue for the return of the deposit does not seem cost-effective. I still have my job, but am not at all confident about its continuing -- and I really could use that $1,000, being in such an uncertain condition.

Would small claims court be feasible?

Carol Oppelaar


Dear Ms. Oppelaar:

Your contract contains a financing contingency. This contingency clause means that you must apply for financing within a stated period of time (usually seven to 10 days) and cooperate in good faith with the lender in providing information which the lender needs to process your loan application.

If you apply and cooperate, but the lender does not approve your loan, then the contract is terminated and your deposit is supposed to be returned to you.

Sometimes a lender will not approve a loan because the buyer does not cooperate by providing accurate or timely information. For instance, a buyer may have second thoughts about purchasing the property and try to "torpedo" his own loan by telling the lender that his financial or job situation is in jeopardy when, in fact, nothing adverse actually has happened. In this case, the seller may be justified in refusing to authorize the return of the deposit.

But, when the buyer acts in good faith and is still unable to obtain a loan commitment, the seller has no basis for refusing to return the buyer's deposit.

The real estate broker who holds the deposit cannot return it unless both parties agree. The broker will not be the judge and decide which party is right and which is not.

Since the seller is being hard-nosed, your recourse is to file a small claim in District Court. You should name the seller and broker as defendants, and explain that the broker is named only because it holds the deposit.

A District Court suit costs only a few dollars to file and is cost-effective. The seller probably will lose if his only reason for holding up the deposit is that he purchased another property.

Pub Date: 11/15/98

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