How You Can Lose Your Earnest Money when Buying a Home
Also known as a good faith deposit, an earnest money deposit is money that you put down before closing on a home you want to buy in order to demonstrate that you’re serious about the purchase. The earnest money deposit is part of the down payment amount you agree to pay when purchasing a piece of property. The purchase agreement must specify exactly the earnest money you’ll put down in order to secure the contract and the amount that will ultimately be deposited as a down payment to secure the mortgage. Usually, the earnest money is deposited in an escrow account, which is managed by a third party, such as a real estate broker, title company, escrow company, legal firm, or bank, during the contract period.
The good faith deposit is mostly meant to protect the seller if the buyer walks away from the deal through no fault of the seller. Once a seller accepts a buyer’s offer, and the transaction starts to move through the home-buying process toward the closing, he or she takes the property off the market so that no other buyers could make offers on the house. But if something happens and the deal falls through, the seller will need to start the home selling process all over again, which may have some financial implications. Thus, the earnest money deposit provides the seller with compensation when the buyer fails to meet the terms of the agreement or cancels the transaction for no reasons or for reasons that aren’t included in the purchase agreement.
Although there are no hard-and-fast rules about how much a homebuyer should put down as earnest money in Florida, the good faith deposit typically varies between 1% and 3% of the purchase price of the property. However, based on the local market conditions and type of property being purchased, it can reach up to 10%. If you’re buying a $350,000 home, for example, you can expect to put down between $3,500 and $35,000. In a competitive or higher-priced real estate market, a larger earnest money deposit could convince a seller to accept your offer instead of other offers.
Losing Earnest Money: It Rarely Happens, but It Happens
As a homebuyer, you can lose your earnest money if you don’t meet the terms specified in the purchase agreement. These terms typically refer to:
- Home Inspection Deadlines – Real estate contracts specify when home inspections need to be completed along with the deadlines by which homebuyers can back out of the contract without losing their earnest money IF they decide that the home they want to purchase isn’t right for them after home inspections are done. In other words, you’ll be able to terminate a real estate contract without any penalties if undisclosed problems are discovered during the home inspection, as long as you’re within the inspection deadlines stipulated in the contract. It is prudent to negotiate a date far enough to allow for home inspections to be performed. In general, buyers must submit timely, appropriate notice of their intent to walk away from the deal before the deadline specified. If you back out of the deal after the deadline, you will lose your earnest money.
- Contingencies – For a homebuyer, a legitimate way to back out of a real estate deal is when the seller fails to meet specific terms and/or conditions included in the contract. That being said, you cannot drop out of a contract without losing your good faith deposit simply because you change your mind. You can also lose your earnest money if you terminate the contract after seeing the property in person and decide that the home isn’t right for you. To avoid any financial consequences, your contract should include a physical-inspection contingency in addition to a virtual tour, which has become the norm in many states during the current health crisis.
- A Non-Refundable Earnest Money Contingency – Good faith deposits are usually deemed non-refundable after the loan contingency deadline, which is often the final deadline in a real estate contract. However, a homebuyer may agree to a non-refundable earnest money contingency when trying to make his or her offer more appealing in a competitive market. Even though it’s not typical, agreeing to a non-refundable earnest money contingency means that you will forfeit your deposit if you cancel the deal, regardless of whether the terms and conditions stipulated in the contract have been met or not.
- “As-Is” Property – When shopping around for a home, you may find different properties for sale “as-is”. This basically means that the sellers want to sell their homes without doing any repairs before closing. If you agree to purchase a home “as-is” and find major problems later, you could find yourself losing your earnest money deposit to back out of the deal. If you intend to buy an “as-is” home, make sure that you have a home inspection contingency included in the contract.
Sometimes, both the seller and buyer mutually decide to void the real estate purchase agreement. In that case, the release instructions, which must be signed by the seller and buyer, should specify the amount and conditions for refunding your earnest money.
To avoid losing your good faith deposit, it’s critical that you understand all the details included in the contract before signing it. If you don’t understand specific terms, make sure that you ask your realtor to explain everything to you, so you know exactly what is required from you and what contingencies are included to protect your earnest money. For more details about earnest money deposits or for information about the mortgage products available to you, please contact our professionals who are always here to help.
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