What Happens to Your Deposit If You Cannot Close

The deposit on a new-home purchase does something a resale deposit rarely does: it sits there for a long time. Months, sometimes considerably longer, while a house is permitted and built, and while your job, your rate, your existing house and your family situation all have time to change.

That gap between paying and closing is the whole risk. It is not that anything is likely to go wrong. It is that the money is committed early and the ability to close is confirmed late.

This article extends the new-construction guide and follows the new-build process guide, which sets out where the deposit falls in the sequence.

To be clear about my role: I am a real estate professional, not an attorney and not a contractor. Deposit terms are legal terms and they live in YOUR agreement. Everything below is a question to ask, not a description of what any agreement says.

Ask three things before you pay anything

How much, and when. New-home purchases often involve more than one payment: an initial deposit, then further amounts at defined milestones, and separately the money committed to options and upgrades. Ask for the full schedule in writing, including whether option money is treated differently from the base deposit.

Who holds it. Whether the funds go to an escrow or title company, to a trust arrangement, or directly to the seller, and what the agreement says about that. This is a factual question with a documentable answer, and it is worth having the answer in writing.

Under what circumstances is it returnable. This is the one that matters and the one people assume. Do not assume. Have an attorney read the language and tell you plainly what triggers a refund, what does not, and what notice is required.

The contingencies are the real protection

A deposit is only as safe as the conditions attached to it. The questions to put to your attorney and, where they are open to discussion, to the seller before signing:

Financing. Is there a financing contingency, how long does it run, and what happens if a loan approval obtained early does not survive to closing. On a long build, the second half of that sentence is the important half.

Appraisal. Is there an appraisal contingency, and what is your position if the appraised value at completion does not support the contract price.

Sale of your current home. If closing depends on selling, is that reflected anywhere in the agreement. Many buyers carry this risk silently.

Inspection. What rights you have to inspect, and what follows if something is found. The stage worth protecting is described in the pre-drywall article.

Delay. What happens to your deposit if the house is not finished when expected. The completion and delay article covers the questions to ask.

The long-build risks worth naming out loud

RATE MOVEMENT is the most common. A loan quoted at the start of a build is not necessarily the loan available at the end, and a payment that was comfortable at the beginning may not be at the end. Ask your lender what protection is available over your actual timeline, and ask a second, independent lender the same question. The preferred lender article covers how to compare honestly.

QUALIFICATION CHANGE is the second. A job change, a new car loan, a business fluctuation, a medical event. Underwriting looks again close to closing, not once at the start. Buyers on long builds should treat their credit position as frozen for the duration, and should tell their lender before doing anything that moves it.

OPTION SPEND is the third and the most self-inflicted. Money committed at a design appointment is a commitment, and it accumulates faster than most people expect. The options article explains why those decisions land early and hard.

LIFE is the fourth, and no contract accounts for it well. It is the reason the honest version of this conversation happens before the money moves rather than after.

Practical discipline

Keep every receipt, every wire confirmation and every written acknowledgement of funds received, in one file with the agreement. If a question arises two years later, that file is the answer.

Verify wire instructions by telephone using a number you already had, never a number in an email. Wire fraud around real estate closings is real, and a deposit sent to a criminal is generally gone. Ask your escrow officer for their fraud-prevention procedure and follow it exactly.

And confirm changes in writing. A verbal reassurance in a sales office about deposit treatment is not a term of your agreement, however sincerely it was offered.

If you think you may not be able to close

Say so early. A problem raised months before closing has options that the same problem raised the week of closing does not. Speak to your lender first, then your attorney, then the seller, in that order, so that when you make the call you already know your position.

And keep the tone straightforward. Most of these conversations go better than people fear, particularly when the buyer arrives with facts rather than apologies.

Where to go next

Go back to the hub above for the whole arc, then read the construction financing guide if you are building rather than buying a finished home.

If you want someone reviewing a new-home purchase in Claremont alongside you, get in touch. Anthony Grynchal has been licensed in California since November 2009.