Earnest Money and How You Can Lose It In Three Simple Ways

October 07, 2015

Earnest Money and How You Can Lose It In Three Simple Ways

Earnest money deposit in the most basic and simplest term is a type of security payment that is put towards the house to ensure the seller that the buyer is serious in purchasing the property. When everything is finalized these funds are put towards the buyer’s down payment or the closing cost. This is because without an earnest money deposit, it could mean that a buyer could make offers on many homes which would take them off the market until you decided which one you liked the best – which is bad news for the seller, right?

So let us say that you are a committed buyer, a question one often asks is: how much should you put down as earnest money? There are several factors to consider such as policies and limitations of your state, real estate market trend and what the seller requires. But in most cases, earnest money deposit is about 1 to 2% of the total purchase price.

If you are wondering where the earnest money deposit is being held during the process – the earnest money deposit is being held by the title company or in most cases the real estate broker. These funds are then placed in escrow – but for a safer transaction, always check the credentials of the firm or broker taking the deposit and verify that the funds will be held in escrow. Never give the money to the seller to avoid any difficulties of getting it back in case something goes wrong.

Will you be able to get your money back if in case the deal doesn’t fall through? Standard contracts allow you to get your earnest money deposit. This is usually in cases when you find problems in the property. However, there are some cases where you can lose your earnest money deposit and here are the ways:

1. You waived your contingencies

There are two kinds of contract contingencies and these are financing contingency (where you will get your money back if for some reason that your mortgage didn’t go through and you are unable to purchase the property) and inspection contingency (where it allows you renegotiate the price or demand for repairs if there are serious defects or damages found during the inspection). But why would some people waive these contingencies? This would make you a more attractive buyer especially with highly competitive market especially with an all-cash buyer. However, waiving these contingencies means a lot of risk to take and that is losing your earnest money deposit.

2. Timeline has not met

Usually your contract set out a defined or specific time frame for the entire process such as securing financing, getting the home inspected and is available for closing. If you are a seller it would be unfair if you wait for these to be processed through and let time pass by – as we all heard the saying “time is of the essence” there is also a clause in the contract that says so. But as long as you’ve made such effort to adhere to these timeline/ deadline, some sellers may grant a reasonable extension for such circumstances. However, if you can’t or unable to make it to close for any reason, that means that you have breached your contract and lose your earnest money deposit.

3. A change of heart

Another reason or way of losing your money deposit is when you get cold feet especially when there is no issue with the property or financing. The money serves as protection for the seller when they take their home off the market. Earnest money deposit can be some sort of their compensation for the time and money that they will have to spend on listing their home again and look for another potential buyer. Getting off their property from the market could also mean lost opportunity just in case the sale didn’t go through.

When buying a property and making sure that you will not lose your money, it would be advisable to bid for a property that you know is the home that you are likely to see as the one.

Source: http://www.realtor.com/advice/buy/here-are-3-times-when-can-kiss-your-earnest-money-goodbye/?identityID=5919493&MID=2015_0918_WeeklyNL-ctl&RID=275806042&cid=eml-2015-0918-WeeklyNL-blog_2_kissmoneygoodbye-blogs_buy

http://www.realtor.com/advice/finance/understanding-the-earnest-money-deposit-2/