Will HUD return the earnest money deposit if a HUD Home sales transaction fails to close?

Should the sales transaction fail to close as scheduled, HUD may consider the earnest money deposit forfeited or may return all or a portion of the earnest money deposit.
Investor Buyer
Subject to state law, the Investor Buyer forfeits 100 percent of the earnest money deposit, unless HUD cancels the sales contract due to HUD’s inability to close the transaction for any reason.
Owner-Occupant Buyers
Subject to state law, HUD will return 100 percent of an Owner-Occupant Buyer’s earnest money deposit in the following circumstances:

  • there has been a death in the immediate family (contract holder, spouse, or children living in the same household);
  • there has been a recent serious illness in the immediate family that has resulted in significant medical expenses or substantial loss of income, thus adversely affecting the buyer’s financial ability to close the sale;
  • there has been a loss of job by one of the primary wage earners, or substantial loss of income through no fault of the buyer;
  • on an insured sale, HUD determines that the buyer is not an acceptable Borrower;
  • on an uninsured sale, the buyer was pre-approved for FHA-insured mortgage financing in an appropriate amount by a recognized Mortgagee but, despite good faith efforts, was ultimately unable to secure mortgage financing;
  • within 30 days of the contract ratification date, the buyer has provided to the AM written documentation from a lender supporting the buyer’s inability to secure financing;
  • HUD cancels the contract due to the documented presence and/or condition of lead-based paint and/or lead-based paint hazards;
  • Pursuant to the terms of the VA Amendatory Clause for purchasers using VA financing;or
  • other circumstances evidencing equally good cause, as determined by HUD.  

In order to receive any part of the earnest money deposit, the Owner-Occupant Buyer must submit documentation to the AM within allowed time limits evidencing the circumstances related to the transaction’s failure to close.
Subject to state law, the buyer forfeits 100 percent of the earnest money deposit in the following circumstances:

  • the buyer does not submit documentation supporting their reason for the return of any part of the earnest money deposit within 30 Days, or such other time allowed by the AM in writing, following contract cancellation; or
  • the buyer’s submitted documentation fails to support an acceptable cause for the buyer’s failure to close.  

Vacant Lots
Subject to state law, buyers of vacant lots will be considered Investor Buyers for the purpose of earnest money deposit disposition.

For additional information please contact the Asset Manager with jurisdiction over the property.  To locate contact information for the Asset Manager please visit the HUD HomeStore website at http://www.hudhomestore.com/ and click “Help” in the gray tool bar.
For policy information see Handbook 4000.1 IV.B.2.i.iii(D)(2)(a)-(b) at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-03105