Ines and Fran are both in their late 20s and have been saving to buy a house for years. To help them reach their goal, Ines’s dad offered them $50,000 to put toward a down payment. He said it was a gift, and just wanted to see his daughter and her partner start their family life together.
Now, Ines and Fran have made an offer on a home that was accepted. Ines deposited her dad’s money into the couple’s joint account, and the mortgage was approved by a broker. But shortly after the purchase agreement was signed, the dad turned around and said he needs the money back. Ines’s uncle is having business troubles and urgently needs a loan, which he cannot get from any lenders. Ines’s dad says that he needs the money to bail out his brother.
The situation has put Ines and Fran in a huge bind. They face either losing the house and possibly thousands of dollars in fees, or being outcast by Ines’s side of the family.
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Losing more than just a home
Ines deposited the gift from her dad into her and Fran’s account so that they could show proof of funds during the buying process to get a mortgage. Fran thinks that what’s done is done, and the money was a gift; Ines is scared of losing her relationship with her dad and other family members.
The big problem for Ines and Fran, aside from Ines’s angry father, is that if they try to back out of the deal now, not only could they lose the earnest money deposit they made when signing the purchase agreement, but they could also lose a lot more.
What is an earnest money deposit?
An earnest money deposit, good-faith deposit or escrow deposit, is money that a buyer puts down to show they are serious about a purchase. In real estate transactions, this deposit is often submitted when a purchase agreement is signed and is held in an escrow account until closing. At that point, it’s applied to the down payment or the closing costs.
There’s no standard amount for deposits, but they’re typically 1 to 3% of the purchase price. Contract terms usually will have contingencies that, if not met, would allow a buyer to back out of a sale. Examples of this include problems found during a home inspection or appraisal, or not being able to secure financing. in these cases, a buyer would get their deposit back.
Simply backing out of a sale is typically not covered, and not only would Ines and Fran lose their deposit if they did so now, but they would also be out any costs they have already paid during the sales process.
Most concerning is that since Ines and Fran have signed the purchase agreement, there’s a chance that the sellers could sue them if any losses are incurred as a result. Some states require that purchase agreements have a clause in them stating that the buyer and seller agree to go into mediation if there is a dispute.
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Things to consider when accepting cash gifts from family
Unless they are both willing to risk losing the house, as well as their deposit, and face the possibility of further consequences, Ines and Fran may have to tell the father it’s too late for them to back out of buying the house.
When giving or receiving money to or from family, it’s important to communicate clearly beforehand to prevent misunderstandings, or worse, major conflicts. Both sides should have a conversation to outline what the gift is for, how much is being given and if there are any conditions attached.
On the part of the person giving the money, it’s important to seriously consider the personal financial implications of giving the gift. Are you in a position to give the money? Do you have enough funds to cover your own expenses or any emergency that might arise? The giver should also be aware of any tax implications of giving money as a gift.
In the case of Ines and Fran, their mortgage lender might have asked them to provide a gift letter. This is a document that states that down payment money was received as a gift to the borrower, and that the money will not need to be repaid. A gift letter also stipulates that the person who gave the gift has no claim of ownership on the property.
Ines’s father should have explained that while his intention was to give them a gift with no strings attached, he might back out on the offer in case of an emergency. Ines may have to give the difficult news to her father that there’s more than just money on the line, and she and Fran would pay dearly if they gave him the money back.
Ines may need to set some boundaries with her father if he continues to insist that his gift be returned. Ines could decide that she wants to set up a plan to slowly repay her father the $50,000 as she is able. Or, she may need to tell him that she only accepted the money because he said it was a gift, and she cannot pay it back. Ines may not want to ruin her relationship with her father, but it only makes sense that she protects her finances as well.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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