Are Additional Earnest Money Deposits refundable if a property doesn’t appraise and the buyer is seeking an FHA or VA loan?

QUESTION: I know that the Due Diligence Fee is not refundable even if an appraisal comes in below the contract price when the buyer is pursuing an FHA or VA loan. But what if the buyer has agreed to pay an Additional Earnest Money Deposit? Is that refundable?

ANSWER: The FHA/VA Financing Addendum (Form 2A4-T) states that for both VA and FHA loans, a buyer shall not be obligated to complete the transaction or “incur any penalty” by “forfeiture of earnest money deposits or otherwise” unless the subject property meets the applicable appraisal amount. For an FHA loan, the applicable appraisal amount is agreed to between the parties and inserted in the provided blank. For VA loans, the applicable appraisal amount is set by the Department of Veterans Affairs and is not set by the parties. In either case, if the appraisal does not meet the appraisal requirements of Form 2A4-T, then a buyer can terminate the transaction and receive a refund of their “earnest money deposits,” even if the termination occurs after the expiration of the Due Diligence Period.

The Offer to Purchase and Contract (Form 2-T) defines the term “Earnest Money Deposit” and states in part that the “Initial Earnest Money Deposit, the Additional Earnest Money Deposit and any other earnest monies paid or required to be paid in connection with this transaction, collectively the ‘Earnest Money Deposit’, shall be deposited promptly and held in escrow by Escrow Agent until Closing, at which time it will be credited to Buyer, or until this Contract is otherwise terminated.” Since the definition of “Earnest Money Deposit” in the contract specifically includes any Additional Earnest Money Deposit, then Additional Earnest Money Deposits are also refundable if an FHA or VA loan buyer terminates due to a low appraisal, even if that termination occurs after the expiration of the Due Diligence Period.

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