Ways You Can Lose Your Earnest Money Deposit

By
Real Estate Agent with RE/MAX Executive Realty 91362

 

How You Can Forfeit Your Earnest Money

Buying a house is an expensive undertaking. There are so many things to pay for, and if you are not careful, you can easily lose money. In most real estate transactions, the earnest money is one of the things you are required to pay.

Many home buyers want to know how earnest money works. Maximum Real Estate Exposure has one of the most comprehensive articles on everything you need to know about earnest money, including how it differs from a down payment.

Basically, the earnest funds is an amount of money a home buyer pays to the seller as a sign of good faith. It ensures a buyer will proceed with the transaction according to the contract. This amount is held in escrow until the buyer signs on the dotted line, in which case the money goes towards paying for the house. This deposit shows the seller you are serious about the offer you make.

Usually, it is about 1-5% of the selling price of the house. In a competitive market, your earnest money deposit can go up substantially. In fact, it might be one of the things your real estate agent recommends you increase in order to make your offer more attractive to the seller.

If you change your mind about the house and wish to pull out, you get your money back as long as it's because of a contingency that wasn't met in the contract. That noted it is important to ensure that you read the contract carefully before writing the check. This is because there are certain circumstances in which you could lose your money.

Here are 3 situations in which you will lose your earnest money:

You Run Out of Time

In the contract for the purchase of the house, there is a timeline that must be adhered to by both buyer and seller. Home inspections and acquiring financing should be done as stipulated in the timeline. For example, if you find defects in the house and wish to back out of the deal, you must notify the seller in writing prior to the expiration of your home inspection contingency.

The same will happen if you cannot get financing to buy the house and don't let the seller know under the provisions of the "mortgage contingency." The mortgage contingency clause will have an express date by which a buyer needs to procure their financing.

If the seller gives you a mortgage extension, ensure that it is done in writing. This is why it is advisable to get your loan pre-approved so timelines are met as they should.

Keep in mind the seller is within their legal right to keep the earnest money if you don't notify them you can't get your mortgage as established under the mortgage contingency clause. In this case, you would be in breach of the contract.

Cold Feet on Buying

Buying a house is a major undertaking. You may find that even after choosing a lovely house you are still not sure it is perfect for you. You may wonder whether it will suit the growth that will take place in your family. If you decide you no longer want the house other than one of the contingencies in the contract, then you will lose your deposit.

The seller is within their rights because he or she has spent time and money on the house. By taking their house off the market they stopped receiving bids. You may have lost them money.

In this circumstance, you may open yourself up to even more legal trouble. This is because the seller will end up incurring more costs because of your actions.

Waiving Contingencies

Contingencies are put in place to protect a buyer. There are three typical contingencies in real estate contracts. They are the financing contingency, inspection contingency, and the appraisal contingency.

The home inspection contingency allows the buyer to walk away if the house is found to have some defects by a professional home inspector. The key, however, is following the contingency clause in the contract. Buyers should have a strong understanding of the most frequently asked home inspection questions.

The financing contingency allows you to walk away with your escrow money if you do not get a mortgage. However, for this to happen, the contingency has to be in your contract from the get-go. Real Estate agents and mortgage brokers should be a part of your team that keeps you informed of important deadlines.

Here are some great questions to ask a mortgage broker when buying a home.

The appraisal contingency makes it possible for you to walk away if the selling price is above the property's value. You will get your deposit back. In case you waive the contingencies, then you will lose money if you back out. Even if you have good reasons for it.

If you have other contingencies in your contract make sure you follow them. By not doing so, you can open up the risk of losing your deposit.

Non-refundable Deposit

If you agree to a non-refundable deposit, you cannot expect to get your money back when you change your mind. It is a great way to convince the seller that your mind is made up.

If there are many people who want the property, it may put you ahead. Sometimes the contract states that the earnest money will become non-refundable after a specific period of time. It is very important that you read the contract carefully before handing over the check. If you do not read it carefully, you could lose your money.

Conclusion

Paying earnest money is a way of protecting both your interest and those of the seller. Ensure that you have read the contract and are certain about the purchase. If you are careful, there is much to gain from making a deposit on a house.

Understand that if you do not follow the terms of the contract your earnest deposit money will be at risk.

Do keep in mind as well that your earnest money is not connected to your house down payment. A significant percentage of home buyers confuse the difference between earnest money funds and the money they put down on the house.

While both are money that comes out of your pocket they are not the same thing.

Other Helpful Real Estate Resources

  • What to think about when buying a fixer-upper - are you thinking about buying a home that needs work? Make sure you have a good idea of exactly what you're getting yourself into. Buying a fixer-upper is often not a cakewalk and turns out to be much more difficult than people imagine.
  • How your road affects the market value - did you know that the type of street your house is located on can have a dramatic impact on the market value? It's true. In the article at Clever Real Estate Guidance, see how your road type will influence the property value.

Use these additional helpful real estate articles to make the best decisions when you're buying or selling a home.

 

Posted by

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

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  1. Mott Marvin Kornicki 11/20/2019 03:52 PM
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Ambassador
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Alan May
Jameson Sotheby's International Realty - Evanston, IL
Helping you find your way home.

Earnest money is highly overrated, in my opinion.  There are a number of ways to exit the contract, and have your earnest monies returned to you. 

But, as you point out, if you don't stay within the constraints of those methods (ie: meeting deadlines, using appropriate contingencies, etc...) there is a real risk of losing your earnest money, which can amount to a substantial loss.

Your real estate professional can help you understand your exposure, but it's important to pay attention to the details.

Nov 20, 2019 08:42 AM #3
Rainmaker
1,056,396
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

True Alan. I think that stems from the fact that most agents don't want to be involved with a dispute and would just assume moving on to the next sale

Nov 20, 2019 08:48 AM #4
Rainmaker
816,595
Nick Vandekar, 610-203-4543
Long & Foster Real Estate Inc 610-225-7400 - Devon, PA
Tredyffrin Easttown Realtor, Philly Main Line

As you say earnest money is a great way to let sellers know how serious you are but there are risks if you do not abide by the contract and your earnest money can be held in escorw sometimes for a little while while you extricate yourself from a contract. It needs the seller to sign off for you to get your funds back.

Nov 20, 2019 10:12 AM #5
Rainer
9,033
Alain Chan 786.338.8328
Quontic Bank (Equal Housing Lender) - Coral Gables, FL
50 states & DC "Stated Income" Owner/Investor MTGs

Great post and thank you for sharing. 

Nov 20, 2019 10:34 AM #6
Rainmaker
679,672
Laura Filip
Laura Filip Broker , Opening doors for All Seasons of Life - Whitesboro, TX
What can we do for you today?

Thank you for sharing the information on earnest money. Every situation is different. Making sure one reads the contractual agreement is very important and understands along with timelines. 

 

Nov 20, 2019 01:29 PM #8
Rainmaker
699,171
Bob Force (REALTOR®)
Weichert - McKenna & Vane - Mount Airy, MD
The FORCE in Maryland Real Estate

Bill Gassett , you covered the topic well.  Yes, the difference between DownPayment and Earnest Money Deposit needs to be explained well too.

Nov 20, 2019 02:22 PM #9
Ambassador
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Jeff Dowler, CRS
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude

This is such important information for buyers to understand about a contract and their EMD. As you pointed out multiple times it's important to read AND understand the contract terms and conditions, and dates.

I often get asked about the earnest moeny versus the downpayment. We should not assume buyers understand the difference.

Nov 20, 2019 05:07 PM #10
Rainmaker
2,793,311
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Those are a lot of different ways and not ones that I don’t want to mess with myself

Nov 20, 2019 11:44 PM #11
Rainmaker
2,793,311
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Jeff Dowler, CRS It’s pretty important and I guarantee you it will be loved like 70% of the time

Nov 20, 2019 11:45 PM #12
Rainmaker
641,516
Debra Leisek
Bay Realty,Inc Homer Alaska - Homer, AK

Great Post! well laid out information...I might print this out and let buyers read it!!  Its all about explaining the process! 

Nov 21, 2019 01:17 AM #14
Rainmaker
458,828
Tom Bailey
Margaret Rudd & Associates Inc. - Oak Island, NC

Our system in NC is different. We have a due diligence period a fee which can be from 0 to $1000 dollars. We also have earnest money that runs 1 to 5 percent. The due diligence money applies toward the sale price,and is gone at signing. The due diligence period is usually 30 to 45 days. Anytime during the due diligence period, the buyer can walk and get their earnest money back. This system usually takes care of earnest money questions!

Nov 21, 2019 01:18 AM #15
Ambassador
767,860
Charita Cadenhead
Keller Williams Realty - Birmingham, AL
Serving Jefferson and Shelby Counties (Alabama)

Earnest money can definitely be a source of contention.  Not only are some buyers and sellers are confused about how they might lose/gain earnest money, once you explain it to them, they don't always understand.  In the end, if  it's truly justified, one will concede.

Nov 21, 2019 06:32 AM #16
Rainmaker
1,095,709
Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

I've only once had a buyer lose their earnest money. They decided not to close on Friday when the close was scheduled the following Tuesday. The market was changing and they felt they had paid too much and didn't want to try to renegotiate. They lost a bundle.

In this area it can go either way - every case is unique and even though everything you've written is true, attorneys seem to be able to often get their clients off the hook.

Nov 21, 2019 02:19 PM #17
Rainer
159,200
Anne Corbin
Long and Foster - Lake Anna - Spotsylvania, VA
Serving Lake Anna & Central Virginia

I absolutely love this article! Thank you so much for writing and posting it.

Nov 21, 2019 05:48 PM #18
Rainmaker
714,794
John Juarez
The Medford Real Estate Team - Fremont, CA
ePRO, SRES, GRI, PMN

Real estate laws, procedures, customs and expectations vary from state to state and, in some cases, withing the same state. While I might be willing to debate with you some of the nuances of your post, one thing is very clear and bears repeating.

Understand that if you do not follow the terms of the contract your earnest deposit money will be at risk.

 

Nov 21, 2019 07:00 PM #19
Rainmaker
2,487,549
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

As the rubber meets the road one better prepare for traction & action. Ernest money says here is my skin & deal the cards...The game is afoot. Lets play!

Nov 22, 2019 07:29 AM #20
Rainmaker
1,566,570
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

Back when I was an agent, earnest money deposits here were simply a token. They were so small that they didn't matter to most people. The accepted amount was $100.

While we used contingencies, etc. to protect buyers and worked to explain it all to both sides, I usually told both sides that if something went wrong, they shouldn't count on getting that money.

Nov 22, 2019 10:59 AM #21
Rainer
538,239
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Now a days in our MLS buyers can walk away from the deal for having no good reason.  It hurts sales

Nov 27, 2019 03:38 AM #22
Rainer
11,951
Lisa Weiler
PM LLC - Los Angeles, CA
Interior Design Expert & Home Stager

Thank you for sharing. This is valuable information.

Dec 02, 2019 11:16 AM #23
Rainmaker
982,263
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

Bill great article on earnest deposits.  We're seeing those numbers rise in our market, but not as much on the lower end.  $500 can hold a home up to $250,000, but I bet they'd want more!

Dec 02, 2019 03:59 PM #24
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Bill Gassett

Metrowest Massachusetts Real Estate
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