Earnest money is very important in a home buying transaction. The deposit is given to a home seller if a homebuyer does not fulfill their obligations. I know what you’re thinking. “But what if _____ happens?” Well, don’t worry. I plan to show you how you might lose your earnest money so you can avoid it.
Three Main Ways To Lose Your Earnest Money
Although I will touch on the most common ways earnest money can be lost, I encourage you to ask your Realtor for more information or study the terms of your purchase agreement.
1. You Waived Contingencies
Real estate contracts come with many contingencies. Sometimes buyers in a competitive market will feel compelled to write a contract forgoing contingencies, so they look more attractive to the seller. Before you consider this, make sure you understand that most contingencies are in place to protect you and your earnest money.
Here is a quick breakdown of the four most common contingencies:
- Appraisal Contingency: If the value of the home you’re purchasing comes in considerably lower than what you’re paying, you want to have the option to get out of the contract.
- Financing Contingency: This ensures that you receive your earnest money back if you don’t acquire proper financing in the allotted time period.
- Due Diligence Contingency: This one allows you to walk away with your earnest money if you find something that reveals unsatisfactory conditions.
- Selling Your Current Home Contingency: If you are unable to sell your current home before closing on the new one, this contingency will let you walk away with your earnest money. Many sellers dislike this contingency.
2. Procrastination or Ignoring Time Frames
There are several parties that get involved during the purchase of a home and several steps that must be taken. Contracts often dictate specific time frames for financing, inspections and paperwork. Do not put these tasks off. If you wait until after a deadline has passed, you could lose your deposit.
A big part of my job, when a buyer is in escrow, is helping them coordinate when everything should be completed.
3. Cold Feet
The purpose of the earnest money deposit is to give the seller some compensation if they remove their home from the market and make plans to sell and a homebuyer decides to not complete the purchase. So if you back out with no good reason, then you may forfeit your earnest money. Before making an offer on a home, make sure you’re ready to follow through.
I know purchasing a home can be scary, and making an earnest deposit can make you feel like you are trapped. But this is not the case as long as you and your Realtor discuss proper contingencies beforehand.
If you have any questions about earnest money for your home purchase, I would love to answer them in the comments.