If you have found your dream home, offering up a good faith deposit shows the seller that you are serious about buying. Usually, that money is applied to your closing costs and your down payment. Should the deal fall through, however, part of your deposit could go up in smoke. If you’re in the market for a home, here are four reasons why you could lose your cash.
What is an Earnest Money Deposit?
Before explaining how you can lose an earnest money deposit, you need to know what it is first. Earnest money, sometimes called a good faith money deposit or an earnest money deposit, is a portion of the sales price offered upfront by a buyer to seller to initiate a contract. When buying a home, you are required to put money in escrow that signifies you are serious about moving forward with the purchase so the seller knows they are not wasting their time with you.
Usually, the amount is at least 1 percent of the sales price, but varies depending on many factors, including local market customs and market conditions. Typically, the earnest money is held by the seller’s real estate agent or attorney and are duly accounted for at the time of closing.
4 Mistakes That Could Cost You Your Earnest Money
1. Failing to Meet Deadlines
When a buyer signs a purchase contract, they also agree to a timeline for home inspections, contingencies and closing. If the deadline passes and you have not checked off all the items on the seller’s list, one of two things can happen.
First, the seller might be willing to give you extra time if something outside of your control kept you from completing the necessary tasks on time.
The second possibility could happen if you do not have a credible reason for not getting everything done and you cannot make your original closing date. The seller could cancel the deal altogether since you have effectively breached your contract. In this scenario, you might not get your deposit back.
2. Agreeing to a Non-Refundable Deposit
Typically, a home buyer is expected to pay between 1 and 3% of the home’s purchase price in earnest money, although that amount can climb higher in a competitive market. In some cases, a seller can use a bidding war to their advantage to leverage certain concessions out of prospective buyers. One of the ways they can do this is by including a clause in the contract that says your earnest money deposit becomes nonrefundable after a certain period of time.
Agreeing to this kind of arrangement can convince the seller that you are committed to buying. However, you are taking a big risk if your financing falls through or the deal does not work out for another reason.
3. Waiving Contingencies
When you are putting together an offer in a multiple offer situation, you may be nervous about asking for too much from the sellers. But any time you sign a contract for a home there are certain contingencies that you agree to. While some are designed to protect the seller, others are there for the buyer’s benefit.
The problem with contingencies is that in some cases, you may feel pressured to waive them to increase your chances of getting the home. When you do that, you put your earnest money at risk because you can no longer use those protections if you later decide not to buy the property. For example, contracts often include a contingency that allows a buyer to walk away if the home does not pass inspection. A lack of adequate contingency protection can lead to a cancelled contract and a lost EMD.
4. Changing Your Mind
No matter how ready you think you are to buy a home, there’s always the chance that you could change your mind. Buying a home is a very personal and emotional decision. For this reason, some buyers may decide on second or third viewing that the home just isn’t the right one for them. If that happens and you have already signed the contract, the seller is completely within their rights to keep your earnest money as payback for losing their time and the sale of the home.
Since there is no contingency for a change of heart, it is important that buyers know that canceling the contract without cause may result in the loss of the earnest money deposit.
Paying earnest money is a way of protecting both your interest and those of the seller. Ensure that you have read the contract and are certain about the purchase. If you are careful, there is much to gain from making a deposit on a house.
Understand that if you do not follow the terms of the contract your earnest deposit money will be at risk.
Do keep in mind as well that your earnest money is not connected to your house down payment. A significant percentage of home buyers confuse the difference between earnest money funds and the money they put down on the house. While both are money that comes out of your pocket they are not the same thing.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200