Putting in an offer on your dream home is thrilling, but one detail of the process you might not expect is a request for an earnest money deposit. What is earnest money, exactly? According to Skyanne Dinnigan, escrow administrator of Pioneer Title Agency, a locally owned and operated title agency that provides title insurance, escrow, account servicing, trustee sales, as well as builder-related trust services, it’s the seller’s main line of defense.
“Earnest money is a deposit made by the home buyer to show that they are serious about the offer,” says Dinnigan. “If a buyer backs out of the contract without valid cause, earnest money may be forfeited to the seller as a reasonable estimate of damages. The exact amount will be spelled out in the contract, but the deposit amount is typically about 1-5% of the purchase price and becomes part of the buyer’s down payment or closing costs at the closing table.”
Once earnest money has been deposited, there are still risk factors that could jeopardize its safe return after closing.
“The first thing that could cost you your earnest money is missing deadlines,” says Dinnigan. “The seller and buyer can agree to a timeline in the contract, with anything from deadlines on home inspections to finalizing the terms of your mortgage loan. If you were to miss a deadline without a credible reason, the potential breach could lead the seller to cancel the deal and make a demand for the deposit.”
In addition to missed deadlines, earnest money can also be lost as non-refundable leverage in a bidding war.
“When a buyer is caught in a bidding war in a competitive market, the seller could include a clause in the contract that says the earnest money deposit will become non-refundable after a specific date,” says Dinnigan. “If the buyer is willing to take the chance, accepting this clause can give a competitive edge but could lose you the deposit if the deal does not work out.”
Sacrificing contingencies in your contract is another way to give a buyer a competitive advantage, but waives any protection that could be set in place to protect both the seller and the buyer.
“Some contingencies are set to protect the buyer, like the inspection and appraisal contingency, which allows the buyer to walk away if the home doesn’t pass the inspection or appraisal,” says Dinnigan. “Although sacrificing contingencies makes your offer more competitive, it puts your earnest money on the line because those protections are gone if you later decide not to buy.”
Another way to lose an earnest money deposit is simply by changing your mind.
“If the buyer gets cold feet and wants to walk away and break the contract, the seller has every right to make a demand for the earnest money,” says Dinnigan. “This helps them cover the costs of having the home off of the market and having to re-list.”
If you have any additional questions regarding your earnest money, Dinnigan recommends talking with your escrow officer or real estate agent.
To learn more about Pioneer Title, visit www.pioneertitleagency.com.