Buying a home involves multiple steps, including providing an earnest money deposit. This deposit is a sign of good faith between the buyer and seller. It indicates the buyer’s commitment to purchasing the property. However, losing this deposit can be a significant financial setback.
I will guide you with the following information so you don’t find yourself losing a significant amount of money:
- Precise definitions of an earnest money deposit and its purpose in real estate transactions.
- Steps to avoid losing the deposit include understanding contingencies, meeting deadlines and ensuring proper documentation.
- Examples of scenarios where buyers typically lose their deposits and how to avoid them.
From being a Massachusetts REALTOR® for the past thirty-eight years, I have noticed that not every buyer and seller understands earnest money deposits. This is especially true of first-time buyers and sellers.
Many buyers will ask how to get their earnest money back when purchasing a home when they don’t intend to proceed. Maximum Real Estate Exposure does an excellent job summarizing the steps.
Let’s examine how you can protect your earnest money deposit.
What is an earnest money deposit?
An earnest money deposit (EMD) is a sum of money a buyer puts down when making an offer on a property. This deposit shows the seller that the buyer is serious about purchasing the home. The EMD is usually 1-5% of the purchase price and is held in an escrow account until the sale is finalized.
It is usually held by the listing agency working with the seller.
Purpose of an earnest money deposit
The primary purpose of the earnest money deposit is to protect the seller. The seller keeps the deposit as compensation if the buyer backs out of the deal without a valid reason. This deposit also motivates the buyer to follow through with the transaction.
Without these funds, buyers could walk away from a transaction without any ramifications. The money holds a buyer’s feet to the fire.
Steps to avoid losing your earnest money deposit
To avoid losing your earnest money deposit, follow these crucial steps:
- Understand contingencies:
- Include contingencies in your purchase agreement. Typical contingencies are financing, home inspection and appraisal contingencies. Sometimes, a home sale contingency will be involved in buyer’s markets.
- Ensure contingencies are clear and specific to protect your deposit if conditions are unmet.
- Meet all deadlines:
- Adhere to all deadlines in the contract. Missing deadlines can result in the loss of your deposit. This is the number one reason buyers do not have their EMD returned by a seller.
- Work closely with your real estate agent to track important dates and stay on schedule. I recommend you put a note on your cellphone to remind you of essential contract dates.
- Ensure proper documentation:
- Keep all documentation organized. Ensure contracts, addendums and other paperwork are complete and accurate.
- Use a checklist to track all necessary documents and ensure nothing is missing.
- Stay in communication:
- Maintain open communication with your real estate agent, lender and seller. Address any issues or concerns promptly.
- Regular updates can prevent misunderstandings and keep the transaction on track.
Scenarios where buyers typically lose their deposits
Many buyers will ask their real estate agent who gets to keep the earnest money when a sale falls apart.
Here are some everyday situations where buyers lose their earnest money deposit and how to avoid them:
- Financing falls through:
- Scenario: The buyer’s mortgage application is denied after the financing contingency expires.
- Solution: Include a financing contingency and ensure pre-approval before making an offer. Ensure you notify the seller’s side before the contingency expires.
- Home inspection issues:
- Scenario: The inspection reveals significant issues and the buyer backs out of the contract without a home inspection contingency.
- Solution: Always include a home inspection contingency to protect your deposit. Even when buying a house being sold as-is, you can get your earnest deposit back with a contingency.
- Missing contract deadlines:
- Scenario: The buyer fails to meet a crucial deadline outlined in the contract.
- Solution: Monitor all deadlines closely and work with your agent to stay on schedule.
Legal protections and the role of escrow
Escrow acts as a neutral third party holding the earnest money deposit until the transaction is complete. This process ensures neither party can access the funds without meeting the agreed conditions. Legal protections vary by state, but typically, buyers have the right to dispute if they believe the seller unfairly kept their deposit.
When a buyer and seller dispute who should keep the money, a real estate agent cannot release the funds. Even if they feel one party is rightfully entitled to the funds, it must remain in escrow.
A court will determine who ultimately gets to keep the EMD.
Seeking legal counsel
If a dispute arises, consult with a real estate attorney. Legal counsel can help interpret contract terms, negotiate with the seller and represent your interests. An attorney can be crucial to recover your earnest money deposit.
Conclusion
Protecting your earnest money deposit involves understanding contingencies, meeting deadlines and ensuring proper documentation. Following these steps will safeguard your investment in the home-buying process.
