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Oct 07, 2020 | By
The Top Ways to Lose your Earnest Money

The Top Ways to Lose your Earnest Money

You put earnest money down to show sellers you are serious about buying the house. The money sits in escrow where neither you nor the seller may touch it. But, if you don't honor your part of the sales contract, you could quickly lose that money, handing it over to the seller for wasting his time.

Is it worth it?

Why Put Down Earnest Money

You may wonder why you would even bother with earnest money, especially if you could lose it.

Earnest money is important, especially in a market like we have right now - a seller's market. When there are more buyers than sellers, the sellers have the upper hand. They can choose the best buyer out of the bunch, which usually means the buyer promising earnest money.

When you put down a earnest deposit, you're telling the lender ‘I'm serious about buying this home and will do what I can to make it happen.' The seller knows you are serious and also knows there's financial compensation on the line if you back out.

It's reassurance for the seller, encouraging him to accept your bid.

But be careful because you could lose the earnest money.

How?

It's not as hard as you think. Check out the scenarios you must avoid below.

You Skip the Contingencies

We get it, you want to be an attractive buyer and contingencies are anything but attractive. But, they protect you.

If you skip the contingencies, yet you find a reason to back out of the purchase, you're leaving your earnest money in the seller's arms. Contingencies protect you - they give you a way out of the contract if things don't turn out right.

What could go wrong? A lot, but here are the three most common contingencies:

  • Inspection - If the inspection report shows the home needs major repairs, you could re-negotiate with the seller if you have an inspection contingency. You could ask him/her to make the repairs or lower the sales price. If they decline, you could back out of the sale with your earnest money in hand. Without it - you walk away without your money.
  • Financing - If your financing is ‘iffy' consider a financing contingency. This gives you an out should your mortgage fall through. Without the contingency, you leave your earnest money to the seller if you can't secure financing.

Missing Deadlines

Your sales contract has specific deadlines. If you don't meet them, you've breached the contract.

Know the dates outlined in the contract and negotiate accordingly. Some key dates include:

  • The date you must secure financing
  • Appraisal date
  • Inspection date
  • Closing date

If you miss one of these important dates, you run the risk of losing your earnest money. Even if you don't, you may delay the closing and the seller may have an issue with it. If you can show that you've tried to do everything as quickly as possible, but things just didn't work out, sellers may be willing to grant an extension. If you sat back and did nothing, though, they may request to cancel the contract and keep your earnest money.

Not Understanding the Home's Terms

Many homes today are sold ‘as-is,' yet many buyers assume they can still back out if the inspection shows the home has issues. They can't.

It's in the title ‘as-is' which means you agree to buy the house with its issues - the seller isn't going to fix them. Usually, the price the seller asks is well below the fair market value, but not always.

Before you sign on the dotted line, make sure you understand the contract terms. Are you buying the home ‘as-is'? Did you have a professional with you when you walked through the home? Are you capable of handling the issues the home has?

If you find out too late (after you sign the contract), you put your earnest money on the line.

Changing your Mind

It happens to the best of us, but it's not good. You think you found ‘the house' only to have buyer's remorse after signing the contract.

No contingency or any other ‘out' will help you in this situation. Changing your mind means the seller has to put the home back on the market and he/she just wasted however many days or weeks you kept the home tied up.

This could put the seller off his own course, especially if he signed a contract to buy another home. Typically, when a buyer changes his/her mind, the seller automatically keeps the earnest money.

Should you Put Down Earnest Money?

It's normal today to put earnest money down on a home. It gives everyone in the transaction reassurance that it will go through.

In today's competitive market, sellers only want to deal with serious buyers - those that will follow through on the contract and not bail. If they accept an offer without it, they are at risk of a seriously delayed transaction if you back out.

If you're deciding whether or not to include earnest money in your bid - do it. If you are bidding on a home that you want to buy and know you can afford it, there's no reason not to put the money down. Just make sure you talk to your real estate agent before signing the contract so that you include the necessary contingencies to protect your interest in the home.

Read on: 5 key steps in buying your own home

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