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How You Can Lose Your Earnest Money Deposit Buying a House

By Bill Gassett | November 24, 2019

What is an Earnest Money Deposit?

Before explaining how you can lose an earnest money deposit, you need to know what it is first. When buying a home, you're required to put money in escrow that signifies you are serious about moving forward. Another way to think about the purpose of these funds is to provide assurances to the seller they are not wasting their time with you.

You could certainly think of earnest money as having "skin in the game." By putting thousands of dollars into a third parties escrow account, you will be at risk of losing them if you do not follow the terms of the agreed-upon contract.

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. The resource above at Maximum Real Estate Exposure discusses a myriad of important topics surrounding earnest money funds. It is well worth reading. It would be best described as the ultimate guide on everything you need to know about earnest money deposits.

How You Can Lose Your Earnest Money Deposit

It's worth mentioning that earnest money and a house down payment are not the same things. Both come out of your pocket, but they are used for different purposes. Speak to your real estate agent or read the article above.

The bottom line is nobody wants to lose their earnest money deposit. Let's talk about how you can so you'll avoid that happening.

Ways to Lose Your Earnest Money

Many first-time buyers think that their money is safe all of the time. Most of the time that is true, but that does not mean you are not ever risking your cash. For instance, there a few ways in which you can lose your earnest money.

Having a solid earnest money deposit is essential, but before you part with any cash, you need to be aware that you can lose this part of the investment you are about to make. As always, you need to cross your t's and dot your I's.

Usually, earnest money represents between 1% to 10% of the money you offer the purchase of a home. That is rather a lot of money in anybody’s book. Most of the time, you will get your money back if you don't move forward with a real estate transaction, but there are some instances you won't as follows:

Don’t Waive Your Contingencies

Some of us are impatient to start the home buying process and would like to complete a purchase as soon as possible. In fact, when the real estate market favors sellers, it is not uncommon at all for buyers to lose out on their dream home to other purchasers. Bidding wars have become fairly common across most of the US.

In times like these, buyers want to make their offer as competitive as possible. One way of doing so is by waiving common contingencies in contracts such as a home inspection and mortgage financing.

Buyers will also increase their earnest money deposit to make their offer more attractive as well. By doing these things, you are taking significant risks.

What would happen if that lovely home you have decided to buy has a substantial defect? If you know you are purchasing a fixer-upper property, that might not be important to you as you've planned for significant additions and improvements. But what if that is not the case?

Unless you have written into the contract that the home inspection needs to have a positive outcome, this is one sure way to kiss goodbye to your earnest money. There are pros and cons to buying a fixer-upper and the potential for a significant issue is definitely a downside.

The same can be said about getting a mortgage. Unless you are one hundred percent sure you will have no problem getting financing, you should not waive your mortgage contingency.

As a real estate agent for the past thirty-three years, I can tell you that it is always smart to have an attorney along with an exceptional buyer's agent who will do everything possible to protect your earnest money.

Doing so is going to cost you a little bit of money, but at the end of the day, it will be worth every dime. We all like to save money on lawyer fees, but the truth is that many lawyers can save you money.

There is nothing like having someone on your side who can read the small print. Never underestimate how vital contract law is in real estate.

Cold Feet and Real Estate

No, we are not talking about underfloor heating. Buyer’s remorse or regret is a significant part of what can happen in many real estate transactions. You may fall in love with one property on Saturday and see another Monday that you know you MUST have. When you hand over your earnest money and don't have a valid reason for getting it back, it will be at risk.

On some occasions, you may not lose all of it, but the truth is that most sellers are not happy to hand back cash. Put yourself in their shoes. What if they have taken the property off the market, and paid an earnest payment themselves?

In fact, this a real risk, and you need to make sure that you are happy to complete the purchase. Buying a home is always an emotional experience, and you don’t want to let your heart rule your head.

Never walk out of the door and tell the real estate agent that you want to buy the property right there and then. Always make a measured decision. Go home and weigh up all of the pros and cons. After all, you are likely to find yourself living in the property for some considerable time to come.

Time Is of This Essence

That sounds really strange, right? It means that you are obliged to complete the sale within a certain amount of time. If you can't do so, you need to renegotiate, or you could stand to lose your earnest payment.

Most sales contract contains a time clause for various contingencies previously mentioned, like a home inspection or procuring financing. If you don't follow the agreement and these contingencies lapse, then your earnest money will be in jeopardy. Therefore, it becomes critical that you maintain in your memory banks the vital dates in your agreement.

Those on your team, such as your real estate agent, attorney, and mortgage broker, should also keep these dates in mind.

Buying a home is just like any other contract. If you don’t complete it on time, the deal could be off. When it comes to real estate, this could mean losing your earnest payment.

Keeping the home buying process on schedule is obviously one of the many vital aspects of getting your dream home and making sure you don’t lose your earnest payment.

Final Thoughts

Buying a house, especially when it is the first time is a big deal. You should never take your earnest money funds for granted. Keep all of the time frames you've agreed to in mind. Stay in the contract and ask for extensions in writing when needed. Work with a detailed oriented real estate agent who understands to the importance of keeping you updated on key contingency dates.

Other Valuable Realty Biz News Resources

Use these additional resources to make great decisions when buying your next home.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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