Application Deposit: An upfront fee paid to the lender to cover third-party reports (appraisal, engineering, environmental) and lender legal/underwriting costs. Usually $15,000 - $30,000.
The Term Sheet is signed. You're excited. The lender asks for a $20,000 "Good Faith Deposit" to start the process.
You wire the money, assuming: "If the loan doesn't work out, I'll get this back."
That assumption is wrong.
Lenders view the Application Deposit not as a holding account, but as an expense account. From the moment you wire those funds, they start spending them.
Where Your Money Goes (Immediately)
As soon as the wire hits, the lender orders third-party reports. These are non-refundable expenses paid to outside vendors.
| Item | Cost (Approx.) | Refundable? |
|---|---|---|
| Appraisal | $3,500 - $5,000 | No (Vendor paid) |
| Phase I Environmental | $2,200 - $3,000 | No (Vendor paid) |
| Property Condition Report | $2,500 - $3,500 | No (Vendor paid) |
| Lender Legal Counsel | $300 - $500/hr | No (Billed hourly) |
| Underwriting Fee | $2,000 - $5,000 | Sometimes (if not incurred) |
The "Borrower Willful Default" Trap
Most Application Letters state that the deposit is refundable only if the lender declines the loan for credit reasons unrelated to your disclosures.
However, if the deal dies because of "Borrower Willful Default," you forfeit everything. Lenders define this broadly:
- Failure to provide documents: If you take too long to send the T-12 and the rate lock expires.
- Material misrepresentation: If your "95% occupancy" turns out to be 85% economic occupancy.
- Change of heart: You decide not to sell, or you find a better rate elsewhere.
- Additional debt: You buy a car or open a credit line during underwriting.
The Rate Lock Deposit (The Big One)
The Application Deposit is small potatoes compared to the Good Faith Rate Lock Deposit.
When you lock your rate, you typically put up 1% to 2% of the loan amount (e.g., $40,000 on a $2M loan).
This is almost never refundable.
If you fail to close for any reason—even if it's not your fault (e.g., a title issue you didn't know about)—the lender keeps this money to pay the "breakage fee" to the bond market.
How to Protect Your Cash
1. Pre-Screen the Property
Don't wire money until you've done your own eligibility check. If the property has aluminum wiring or verified mold, don't pay for a Property Condition Report to tell you what you already could have known.
2. Verify the Rent Roll
Ensure your NOI calculation matches the lender's preliminary underwriting before signing the application. If their term sheet assumes $150k NOI and you actually have $130k, the loan proceeds will drop, and you might walk away—forfeiting your deposit.
3. Negotiate the "Out" Clauses
Ask for language that refunds the lender fees (legal and underwriting) if the third-party reports kill the deal. You can't avoid paying the vendors, but you shouldn't pay the bank's lawyers if the building has structural issues.
Summary
- The deposit is spending money: It pays vendors, not your loan balance.
- Third-party reports cost $10k+: This money is gone the moment the reports are ordered.
- "Willful Default" is broad: Slow/messy diligence can be grounds for forfeiture.
- Rate Lock is dangerous: 1-2% of loan amount is at risk if anything stops closing.