Arizona Real Estate Law

by Christopher A. Combs

The following is for informational purposes only and is not intended as definitive legal or tax advice. You should not act upon this information without seeking independent legal counsel. If you desire legal, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant.

Purpose of Property Contingent on Financing, Not Down Payment

Question: Two months ago we signed a contract to purchase a home in Gilbert. We could afford the monthly mortgage payments based on an 80/20 mortgage, and we had the savings for the 20% down payment. After we opened escrow, however, our son was involved in a serious motorcycle accident. We had to use our savings to pay for our son’s physical therapy and medical bills, and we no longer had the 20% down payment. Inasmuch as we could not close escrow, we requested the return of our $10,000 earnest money from the title company. The title company, however, released the $10,000 earnest money to the seller. Our purchase contract states that we are entitled to the return of our earnest money if we do not have the money to buy the home. Do we have a claim against the title company for releasing our $10,000 earnest money to the seller?

Answer: No. One, under the standard purchase contract your purchase of the home was contingent upon you qualifying for the financing for the home, and not contingent on you having the money for the down payment. In other words, if you qualified for the 80% loan, but did not have the 20% down payment (even if you did not have the down payment for a bona fide reason such as medical expenses), you are in breach of the purchase contract. For this breach of the purchase contract the seller is entitled to your $10,000 earnest money. Two, even if the title company wrongfully released your $10,000 to the seller, you have no claim against the title company. Under the standard purchase contract the seller and buyer grant the title company "sole and absolute discretion" to release the earnest money.

Phoenix attorney Christopher A. Combs is a partner with the firm of Combs Law Group, P.C. Reprinted with permission. Copyright 2006, all rights reserved.

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