An application deposit is a cash deposit collected at term-sheet acceptance, typically $25K to $150K, that funds the lender's third-party reports ( appraisal , environmental, engineering) and lender legal during underwriting . It is refundable to the borrower at closing minus actual costs incurred.
What does the deposit pay for?
Appraisal, Phase I environmental, property condition / engineering report, zoning, ALTA survey, and lender legal fees billed during the diligence period. The lender draws against the deposit as invoices come in. Unused funds are credited back at closing or refunded if the deal does not close.
When is the deposit at risk?
The deposit covers actual costs incurred. If the borrower walks away after the lender has ordered reports and engaged counsel, the borrower forfeits whatever the lender has spent. Borrowers minimize this risk by only signing a term sheet on a deal they are committed to closing and by negotiating a deposit cap.
How can a borrower negotiate the deposit?
Cap the lender legal line item, scope which reports are required (e.g. waive seismic where there is no seismic risk), require the lender to share invoices monthly, and negotiate a return-on-failure clause that returns the deposit if the lender materially changes terms after acceptance.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Multifamily Market Commentary · Fannie Mae Economic & Strategic Research · 2026-Q1