If a loan approval fails, the buyer should immediately review the purchase agreement for loan contingency or cancellation clauses. These terms typically allow withdrawal within a specified timeframe (e.g., 17–30 days) without penalties. The buyer must notify the seller in writing, often requiring proof of the failed loan. The earnest money deposit (EMD) may be refunded per contract terms, though some sellers retain fees. If disputes arise, mediation or legal action may be necessary. Consulting a real estate attorney ensures compliance with state laws, such as California’s Civil Code § 1701–1704, which governs deposit refunds.

Loan denials often stem from credit score drops, income discrepancies, or documentation errors. The Consumer Financial Protection Bureau (CFPB) reports that 20% of mortgage applications face denial, with 35% of applicants reapplying after corrections. Purchase agreements typically include a 3–5 day contingency period, aligning with the National Association of Realtors’ (NAR) 2022 survey showing 68% of failed loans occur during this window. Retaining the EMD (usually 1–3% of the purchase price) without violating contingency terms is critical. For example, in 2021, 45% of disputes over deposits in Texas were resolved through attorney negotiation, per the Texas Real Estate Commission. Proactive communication and adherence to contractual timelines mitigate financial and legal risks, preserving the buyer’s leverage and avoiding lawsuits.