A solid contract with an earnest money deposit shows a seller that you have both the resources and the desire to close the deal. Including a considerable deposit could even help your offer be selected over the others. Buyers stand to lose their earnest money if they back out on a real estate transaction. Earnest money gives sellers assurance that a buyer won’t back out of the contract without valid cause, as they have money tied up into the house and will be less inclined to retreat. For more information, read: Protect Your Earnest Money Deposit.
Most contracts have contingencies that allow buyers to walk away from a home. Two examples are if the house can’t pass inspection or the buyer can’t qualify for financing. But, if a buyer decides to cancel the contract for a reason not covered by a contract contingency, earnest money is generally not returned.
The amount of earnest money amount you’ll have to put down will vary according to your area, seller and price of home. Your earnest money deposit could range anywhere from a couple hundred dollars to a few thousand. So much depends on the market and the specific house. A competitive market might mean you’ll need to put down more money. Most agents agree that buyers should include an earnest money amount that will be taken seriously, but not so much that a buyer’s finances are at risk. It’s unlikely that you’ll lose your earnest money deposit, but it’s important to protect yourself. Read: Deposit vs. Down Payment.
You’ll typically use a third-party escrow agent such as the title company, to hold your earnest money deposit in an escrow account. You should avoid giving the deposit to the seller directly. If the transaction doesn’t close and the seller cannot return the money, you may have to take legal actions. Giving the money to a third party escrow agent protects the buyer from questionable sellers.
The terms of the contract decide where earnest money lands if the contract is broken. For example’s sake, let’s say that a buyer’s contract has made the final purchase contingent on the results of an inspection. Well, if the inspection reveals issues that are unacceptable to the buyer, the buyer can walk away from the house with his earnest money deposit. If the buyer backs out simple because he found another house, earnest money will likely not be returned. For further reading, check out: Three Times You Can Kiss Your Earnest Money Goodbye – Realtor.com.
Earnest money is paid at the time of your offer. These funds are held in an escrow account managed by the buyer’s real estate agent or the title company. The deposit is then applied to your closing costs or returned to you after the deal is closed.
What are Typical Contract Contingencies?
▪ Contingent on the appraisal: Certain loans automatically protect a buyer’s earnest money in the event the appraised value comes in below the purchase offer.
▪ Contingent on a home inspection: This contingency allows you to walk away from a home with your earnest money if the inspection reveals unsatisfactory housing conditions.
▪ Contingent on obtaining financing: This contingency assures that you receive an earnest money refund if you don’t receive proper financing in time.
▪ Contingent on selling your current home: If you’re unable to sell your house before closing on your new home, this contingency lets you walk away with your earnest money. Many sellers aren’t fans of this contingency, given the unpredictable nature of real estate.