Earnest Money Protection

Every homebuyer in Colorado that is obtaining a mortgage loan to purchase a property needs to be familiar with the language in the standard Colorado real estate contract that relates to the "Loan Objection Deadline”. Failing to understand exactly what this language means could result in the loss of the earnest money deposit.

The Colorado Department of Real Estate has developed a standard real estate contract that is used for almost all residential real estate transactions. Most people who buy a home need a mortgage loan. And at the time the contract is executed, very few homebuyers know definitively that they can obtain a mortgage loan. Accordingly, the standard contract contains language that allows the homebuyer to “escape” from the contract and recover the earnest money if the homebuyer is unable to obtain a mortgage loan.

During the contract negotiations between buyer and seller, one of the negotiating items is the Loan Objection Deadline. This will be a date that will between the date the contract is signed and the date of closing.

The homebuyer has until the Loan Objection Deadline the ability to notify the property seller that a mortgage loan cannot be obtained. If such notification is made to the seller before this Deadline, the contract is cancelled and the earnest money is returned to the buyer. But if such notification is not made by the Loan Objection Deadline, this contingency is eliminated. And if the homebuyer is ultimately unable to obtain a mortgage loan and complete the transaction, the buyer will be in default on the contract, and the buyer’s earnest money is lost.

While each mortgage provider is different, most providers will issue to the homebuyer a "Loan Commitment" A Loan Commitment is a document issued by a mortgage lender that will notify the homebuyer that they have been approved for a mortgage loan. The typical Loan Commitment will have conditions - the homebuyer will have to satisfy these conditions in order to obtain the mortgage loan. Some conditions will be standard in every Loan Commitment, and some conditions will be unique to the specific transaction.

Most homebuyers mistakenly think that they are assured of obtaining a mortgage loan once they receive a Loan Commitment. Problems arise for homebuyers if the Loan Commitment has a condition that cannot be satisfied. If the Commitment has a condition that the homebuyer is unable to satisfy, the loan will not be available, which means the homebuyer will not be able to purchase the home and they will lose the earnest money deposit unless they notify the seller.

Given these potential issues with Loan Commitments, there are certain actions that every homebuyer should consider.

First, set the Loan Objection Deadline at least 4 weeks after the contract is executed. This gives the mortgage provider enough time to issue a “clean” Loan Commitment with no conditions or very minimal conditions.

Second, make sure the mortgage lender is knowledgeable about this Loan Objection language in the real estate contract. Confirm with the lender that the Loan Objection Deadline is a reasonable date by which a Loan Commitment can be issued.

Third, review the Loan Commitment carefully, paying close attention to any conditions set forth in the Loan Commitment.