Third party deposits are when a person/entity who is not the buyer deposits money on behalf of the buyer. The third party could be Mom and Dad, a relative, friend or even the buyer’s business. When this happens, escrow requires a Third Party Deposit instruction from both the depositor and the buyer immediately upon deposit of those funds.
The instruction says the funds are for the use of the buyer and the depositor gives up any right to the funds as far as escrow is concerned.
This is important for two reasons:
- If there is a cancellation of the escrow and escrow determines the deposit is returned to the buyer, we have the instruction that the third party gives us right to the funds and we remit the funds to the buyer.
- When escrow is preparing a settlement statement for a new loan, we are required to make full disclosure as to where any money came from in the transaction. Therefore, we make an entry on the statement that shows ‘Third Party Deposit’. This shows the lender that the money did not come directly from the buyer. Lenders want to know if the buyer had the money to put into the purchase and the loan.
The current foreclosure climate has had lenders and mortgage insurers investigating loans from 2003 to present to determine many things about the transaction, one being an undisclosed third party deposit. In some instances title companies are being asked to buy loans from lenders and/or mortgage insurers to abate their losses.
When an earnest money deposit is written on Joe Smith LLC and the buyer on the contract is Joe Smith, we still need a Third Party Deposit Instruction – Joe Smith LLC is an entity and Joe Smith is a person.
Special thanks to Pat Darrall, Escrow Auditor for today’s post…