An earnest money deposit is a specific form of security deposit made in real estate transactions to demonstrate that the applicant is serious and willing to demonstrate an earnest of good faith about wanting to complete the transaction.
Earnest money deposits are one of the most misunderstood parts of the home-buying process.
Depending on where you live, you can expect to put down anywhere from $500 to even 10% of the home’s purchase price as earnest money. (In some highly competitive markets, buyers are making even larger deposits in an effort to stand out and to convince the seller that they are more financially qualified than their competitors.) An earnest money deposit tells a seller you are serious about closing. Without earnest money, you could theoretically make offers on multiple homes, essentially taking them off the market until you decide which one you like best.
Don’t worry—there is no chance of the seller running off with your cash as the funds are deposited into your broker’s escrow account or with the title company until the sale closes. And, if everything goes off without a hitch, that earnest money is applied toward your down payment and closing costs. So there’s nothing to lose, right?
Probably not, except these three scenarios where your earnest money could be forfeited to the seller.
1. You waived your contingencies
In highly competitive markets, it’s becoming more common for buyers to waive contract contingencies regarding financing or an inspection. You might be tempted to do the same—it will make you a more attractive buyer. But it also comes with serious risks. You guessed it: You might lose your earnest money deposit.
The financing contingency guarantees that you’ll get your money back if for some reason your mortgage doesn’t go through and you’re unable to purchase the house. The inspection contingency allows you to renegotiate the price or demand repairs if serious defects are found during the home inspection.
If your contract doesn’t have such buyer protections and you run into trouble with the inspection, you won’t be able to get your money back if you abandon the deal. Most experts recommend that you not waive the inspection contingency, unless you’re planning on tearing the property down.
We strongly encourage our clients to obtain a conditional approval before signing a non-contingent contract. Otherwise, it may turn out that you cannot secure the financing to fund your proposed purchase, or you may determine the bank’s terms are unacceptable and, in either situation, you may lose the deposit.
2. You ignored the timeline outlined in the contract
Your contract usually sets out a specific time frame in which you’ll need to secure financing, get the home inspected, come to terms with the seller regarding the repair of any adverse conditions identified through the inspection, and be available for the closing. Generally speaking, as long as you’ve made a good-faith effort to adhere to the timeline, sellers will grant a reasonable extension if a lender drags his feet or there are other extenuating circumstances that delay things.
However, in some cases sellers may include a “time is of the essence” clause in the contract. Watch out for this phrase in your paperwork—it means the closing date for the sale is binding. If you can’t make it to close for any reason, you’ve breached the contract and could lose your deposit, however, in most instances a seller’s priority will be to close the sale. If the lender offers assurances they will be able to close your loan in a reasonable period of time, a seller will typically work with you however, they may require a per diem, that is a per day charge to offset their costs. In most instance your seller, is also a buyer and purchasing a home themselves and the delayed sale of their current home will likely delay their purchase resulting in additional expenses for them.
3. You get cold feet
If you have a change of heart about the home you’re buying—but there’s no problem with the property or the financing—it’s unlikely you’ll get your money back.
And this should make sense, if a buyer changes their mind and was able to request the earnest deposit be returned without consequence then the whole concept of a contract would no longer be worth much. One party cannot simply walk away and default on a whim.
The earnest money deposit serves a protection for the sellers when they take their home off the market. If late in the game you decide that you no longer want to make the purchase, they get to keep it as compensation for the time and money they have to spend on listing their home again and looking for another buyer.
When it comes to real estate, a case of buyer’s remorse could be even more painful than a lost deposit. To avoid both, make sure the home you’re bidding on is “the one.”
For additional details read How Do We Get Our Earnest Deposit Back
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235