Earnest money is the “deposit” paid by the Buyer to secure it performance under the contract. The “deposit” is held in escrow. If the Seller does not accept the contract, the “deposit’ will be returned to the Buyer. If the contract is accepted by the Buyer and Seller, the deposit will be disbursed at settlement.
An earnest money deposit is a great way to show a seller you’re serious about the offer you’re making on their home. By placing a deposit towards your down payment, demonstrates your commitment to follow-through on the contract, you’re saying “I love this home and I’m ready to go.” But there’s a real risk involved: If you make a mistake, you might just be out a chunk of cash.
Here are some ways to avoid burning your home-buying bankroll in lost earnest money:
1. Make sure it’s the home you really want. Sure this seems obvious, but it’s easy to get swept up in the moment. Recognize that you’re about to enter into a legally binding contract and that the money you’re risking will hurt if you change your mind. While you may not be able to drag your feet on the decision, check your gut to see if there are any reservations lurking there before you go all in.
2. Don’t sacrifice contract contingencies. Don’t let your desire for a home cause you to blindly remove contingencies which are built into contracts to protect buyers. Common ones include loan contingencies, home inspections, title search issues, appraisal, and insurance obstacles. Waive these at your own peril.
3. Avoid committing to a home “as is.” If you’re putting earnest money on an offer for a foreclosed home or any home, don’t be too eager to accept any problem the home may have. Take the time to understand the home’s issues before you write the offer.
4. Read the contract timelines. Look at closing dates and other dates related to the process leading up to closing. Violating the timeline could cost you your earnest money as well.
5. Ensure you have recourse to get some or all of your earnest money back. If the sale doesn’t go through, you and the seller will need to sign a document voiding the agreement. Don’t sign this until you understand how it will impact your earnest money refund. The seller’s title can be negatively impacted if you don’t sign off, so keep your leverage handy until you’re sure you’ve been fairly treated.
Protect yourself and your down payment by playing smart with your earnest money. If you have questions or concerns, ask your agent to help you understand everything in plain language!
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