Can a Buyer Get the Down Payment Back?
In New York a buyer who walks away from a signed contract usually loses the down payment. The contract's contingencies are what protect it.
When a New York home buyer signs a contract of sale, the buyer usually pays a down payment of about 10 percent of the price, which the seller's attorney holds in escrow until closing. If the deal falls apart, who keeps that money depends on why.
The starting point: a defaulting buyer loses it
New York's highest court settled this decades ago. A buyer who defaults on a real estate contract without a lawful excuse cannot recover the down payment, and the seller may keep it without having to prove any actual loss (Maxton Builders, Inc. v. Lo Galbo, 68 N.Y.2d 373 (1986)).
A change of heart, a better house, or cold feet is not a lawful excuse. On a $700,000 purchase, that can be a $70,000 mistake.
The mortgage contingency
Most contracts for buyers who are borrowing include a mortgage contingency clause. If you apply for the loan in good faith and cannot get a commitment within the period the contract allows, you can cancel and get the down payment back.
The protection is real, but it is conditional:
- You must apply promptly and honestly, for the loan the contract describes.
- You must give notice on time. The clause sets a deadline for cancelling. A buyer who misses it can lose the protection.
- You must not cause the denial, for example by quitting a job or taking on new debt while the application is pending.
The hardest cases arise when a lender issues a commitment and then withdraws it after the contingency period has ended. Whether the buyer gets the down payment back then depends on the wording of the contract and on whether the buyer was at fault for the withdrawal.
Other grounds for getting it back
- The seller cannot deliver good title. If the seller cannot convey the title the contract requires, the buyer is generally entitled to the return of the down payment.
- The seller defaults. If the seller refuses to close, the buyer can recover the down payment and may have other remedies as well.
- Another contingency is not met, such as one tied to an inspection, the sale of the buyer's current home, or co-op board approval.
- The property is seriously damaged before closing, depending on the contract and the circumstances.
"Time of the essence"
In New York, the closing date written in a residential contract is usually a target and not a hard deadline. A reasonable delay by either side is generally not a default.
That changes if the contract says time is "of the essence," or if one side later sends a proper notice making it so. Such a notice must be clear, must set a specific date, and must give the other side a reasonable time to get ready. A buyer who fails to close on a valid time-of-the-essence date is in default, and the down payment is at risk.
If you receive one of these letters, treat it as urgent.
What a buyer should do before signing
- Have a lawyer review the contract. In New York, a contract of sale is negotiated by the attorneys before it is signed.
- Make sure the mortgage contingency matches the loan you are actually applying for: the amount, the type, and a realistic time period.
- Put the notice deadline on your calendar and your attorney's.
- Do not change jobs, make large purchases, or open new credit before closing.
If there is a dispute
The escrow agent generally will not release a disputed down payment to either side without an agreement or a court order. These disputes often turn on dates and on the exact words of the contract and the notices.
If you are in a dispute over a down payment, or about to sign a contract, call the office. For more, see Real Estate and why an accepted offer is not a contract.
Attorney Advertising. These posts are general information about New York law, not legal advice about your situation, and reading them does not create an attorney–client relationship. Laws and deadlines change and depend on the facts; each post speaks as of its date. See the full Disclaimer & Disclosure Statement.