How Easy is it to Lose Your Earnest Money?

Earnest money deposit is the money that you put down when purchasing a house in order to hold the property so that nobody else sweeps in and buys it out from under you. It’s the security deposit, basically, this shows sellers you are a serious buyer and you’re willing to put money down on the property in order to get it. Earnest money deposit can be as little as $500 or up to 5% of the purchase price of the home. The more earnest money deposit a buyer puts down, typically the more serious they are about trying to get the property, especially in a hot seller’s market. However, some buyers, those with FHA or zero down home loans, may still want the home desperately that may only have about $500 to put down.

How Easy is it to Lose Your Earnest Money?

Either way, how do you get your earnest money back and is it easy to lose?

Earnest money doesn’t mean that as soon as you put it down you’re going to lose it if something should go awry. There are several ways to get earnest money back but there are also ways to lose it. Here are some ways that you can usually get your earnest money back.

The house appraises for less than expected.

If the property comes back with a low appraisal, meaning that you are willing to pay more than what is appraised for, you can either terminate the transaction and get your earnest money back or make up the difference. The seller could also lower their price as well and these are all negotiable items that can be talked through, but basically, if you choose to back out after the appraisal comes in lower than expected, you can do so and get your earnest money back.

Financing falls through.

If for some reason your financing falls through between the time you purchase the property and close on the property, you can usually get your earnest money back. Most purchase and sale contracts will have a financing contingency. This means that unless financing goes through, the home cannot be purchased and the earnest money will be returned to the buyer.

The inspection returns items you’re not willing to deal with.

Most purchase and sale contracts will also have a home inspection contingency. This means that once you have the home inspected if there’s anything that cannot be resolved, has a major flaw, or you’re just not willing to put in the work to negotiate, you can terminate the transaction and get your earnest money back. Most often though, home inspection contingencies will be negotiated and unless there’s some major issue, buyers and sellers can come to an agreement.

The seller backs out.

If for some crazy reason the seller just decides to not sell their property, that’s nothing the buyer has control over and so they automatically will get their earnest money back.

Reasons you won’t get your earnest money back.

If you wave contingencies.

In highly competitive market is common for buyers to waive home inspection contingencies, financing or even appraisal contingencies. Although this sounds more attractive to a seller, it could be the nail in the coffin for buyers. If you decide to back out after finding out certain items or if you decide to backpedal on the no contingency decision, you could risk losing your earnest money deposit.

You’ve ignored timelines.

There are timelines set forth in the purchase and sale contract. Buyers have a certain amount of time to apply for financing, have a home inspection, get a good faith estimate and basically do everything they need to do in order to close on time. If buyers sale to meet those contingencies and the seller decides to terminate the transaction, the buyer could risk losing the earnest money deposit.

You simply want out of the deal.

If you have a really good buyers agent they will usually be able to find a good reason to get out of the transaction and get your earnest money back but, if there’s really no good reason, you’re simply getting out of the contract because you feel like it and leaving the seller to go back on the market, you might risk losing your earnest money because you have now wasted the sellers time, energy and marketing dollars and now they have to start all over.

Again, it’s important to have a great buyers representative on your side working for you to explain all of the details, navigate the sometimes confusing world of purchase and sale contracts and offer suggestions and advice on how to go about negotiating or getting your earnest money back. For more answers to your real estate questions feel free to call us at any time. You never know when one of your questions will make it into our blog.

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