When a mortgage application is denied after a deposit has been paid, the outcome depends on the terms of the purchase agreement and local real estate laws. The deposit, often called an earnest money deposit, is typically refundable if the denial stems from issues within the buyer’s control, such as poor credit, insufficient income, or documentation errors. However, sellers may retain the deposit if the buyer cancels the transaction without valid justification or if the denial is due to external factors beyond the buyer’s responsibility. Legal disputes may arise if the seller refuses to refund the deposit despite a valid denial reason.

Mortgage denials after deposit payment often occur due to underwriting criteria not being met post-submission. According to the Consumer Financial Protection Bureau (CFPB), approximately 20% of mortgage applications are denied, with common reasons including credit score discrepancies (35% of cases), income instability (28%), and documentation gaps (22%). The National Association of Realtors (NAR) reports that 15-25% of earnest money deposits are not refunded when transactions fail, varying by state laws. For example, in California, the deposit is generally refundable if the denial is due to buyer-related issues, while in New York, sellers may keep the deposit if the buyer withdraws unilaterally. Additionally, data from the Federal Housing Administration (FHA) shows that 12% of applicants with deposits lose them due to post-approval underwriting failures, such as employment changes or new debt. These statistics highlight the importance of reviewing purchase agreements and state regulations to ensure deposit protection in case of mortgage denial.