Buying a home is usually the largest purchase in someone’s life, so understanding the full process is critical. Part of the process includes earnest money, which is money paid to the seller when an offer is accepted. This acts as insurance for the seller because it shows that the potential buyer is invested and serious about the home. Knowing what circumstances may arise that could put earnest money in jeopardy can save home buyers money and stress. Let’s take a look at the most common scenarios of when earnest money is not returned to the potential buyer.
Breach of Contract
If there is a breach in the sales contract, the home buyer will not get their earnest money back. This can include missing critical deadlines (such as responding to the home inspection within the deadline agreed upon), changing your mind for no legitimate reason and withdrawing the offer or not paying the agreed upon amount of earnest money. Any of these scenarios can prevent the sale of the property from moving forward in a timely manner. Earnest money plays a key role in guaranteeing both parties uphold and fulfill their end of the sales agreement when entering into real estate transactions, and failing to meet the terms of the agreement result in a breach of contract. Read the agreement carefully.
Contingencies
Several types of contingencies can result in a buyer getting their earnest money returned. This most often happens when there is a problem with financing, specifically financing being denied. The buyer’s current home sale falls through, the home inspection does not go well, the appraisal comes in lower than the agreed upon sales price, and many other situations. The best way for a potential home buyer to save their earnest money is to have an experienced realtor write well-worded contingencies in the sales agreement that allow the buyer to back out in the event something does not go as planned. For example, if the home inspection shows damage the buyer does not want to manage or fix, and neither does the seller, the realtor could have written in the sales agreement that the buyer can withdraw their offer based upon any potential repairs or damage found in the home inspection report.
Why Buyers may Waive Contingencies
For some buyers, waiving certain contingencies can be a great way to make an offer more attractive or competitive. Waiving contingencies like appraisals and the home inspection may sometimes demonstrate the buyer’s commitment to the purchase, or make the offer stand out from others. It is not advisable for buyers to waive appraisals or home inspections. However, for some buyers this tactic allows the process to move more quickly through the transaction process.
Tips for Buyers to Protect their Earnest Money
When looking at buying a home, it’s important for buyers to protect their earnest money. The first step is to work with an experienced realtor. Next, make sure the deposit is held in an escrow account where the money can be used as part of the down payment or towards closing costs. If a buyer pays in cash, they should get a receipt to document the payment. Third, confirm that the agreement clearly states any contingencies about when and how the earnest money may be returned if those contingencies are not met. This will set expectations and minimize confusion if the deal fails to close. Finally, do not procrastinate when it comes to the paperwork and deadlines. Many deals fall through or get delayed because the buyer did not complete their paperwork, or get the required information together, in a timely manner. Following these tips will ensure that the process runs smoothly.