Booked but cannot get loan, how? TPC – Practice Q18

What if I did not get the loan but I have already booked the property? (Paid earnest deposit)

This is the single most important reason that an agent should be appointed in dealing with your seller. When there is a condition to the purchase of your property (subsale), you are allowed to take back the booking fee or earnest money when this condition is not fulfilled. This money is kept with the agent’s client’s account. It should be returned to you. Of course, this condition should be expressly stated in the offer to purchase. For example, you put a condition that you would proceed to sign the sale and purchase agreement only when you could obtain financing. This condition is stated in the offer. When the seller accepts this offer, he also accepts the condition. Which means, only after the financing has been obtained, it becomes a contract. In other words, only when there is no more other conditions - as it becomes unconditional, the contract is formed.

If your did not have an agent. You gave the earnest money to the seller (vendor), and your loan is not approved. By right, he has to return you the money. However, in real life, he can drag on and on - not paying your money back. If you have an agency to handle that for you, immediately when the deal is called off, you get your money back. Your earnest deposit or booking fee is with the agent in the firm's Client's Account. In an unsuccessful sale, the agent moves on to the next potential purchaser.

In the condition that you prefer to go to the lawyers immediately to sign the sale and purchase agreement and do away with your earnest deposit, well you can do that with risks. First, you have to have the cash ready to pay the seller. And, you have great confidence that you will be approved for bank loan. However, these are rare occurrences.

Let us say you go to the lawyer to sign the SPA without booking, and in the agreement you agreed to pay the remaining sum by loan (90%). Then, you apply to the bank. Wait for approval and by 90 days (or any limit set in SPA - usually 3 + 1 month) the loan might not be approved. When this is the case, you have no turning back. Your 10% deposit will be in risk of being forfeited when your bank loan is NOT approved. Of course, this is not a problem if you are prepared to sacrifice the 10% deposit.

Why? The contract is already formed. A contract (SPA) cannot have uncertainty - or condition. When you need to depend on your bank loan, the contract becomes uncertain. When it is conditional (uncertain whether the condition will be met), there is no contract. One of the elements of contract is certainty. Thus, in such situation, it becomes a breach of contract - meaning that the contract cannot be performed. Such is called 'frustration', a contract is discharged due to frustration. In usual cases, a compensation is paid to party who suffered the loss. In this case, the seller. As the seller fails to get paid the 10% deposit will be forfeited to the seller.