Once home buyers find a home they love, they declare their commitment to the seller with a sizable chunk of change known as an earnest money deposit. Yes, it sounds so sincere and serious because it is—and if you get it wrong, you could lose thousands of dollars. To scare you straight, here are eight mistakes with earnest money that home buyers often make. To ensure you don't end up among them, read on to avoid these snafus.
Mistake No. 1: Not understanding what earnest money is
First, make sure you fully grasp what an earnest money deposit (EMD) is—namely, proof that a real estate buyer is earnest, or committed to completing a sale by having skin in the game. The amount of earnest money is negotiable between the buyer and seller, but is usually about 1% to 2% of the purchase price (although it can shoot up to 10%). This good-faith money is generally held by the real estate seller's broker or in escrow by a title company, to be used as a credit toward the down payment and closing costs.
Mistake No. 2: Offering too little, or not enough
In an aggressive real estate seller's market, many homes receive multiple offers from anxious buyers. For a home buyer's offer to stand out, your Realtor® may advise you to include an EMD in your offer that will get a seller's attention & should be able to recommend an appropriate amount to go with your offer.
Mistake No. 3: Removing contract contingencies
A big mistake real estate buyers make with their earnest money deposit is agreeing to remove contingencies that give them wiggle room they may legitimately need. For instance, if buyers agree to remove a loan contingency and their financing falls through, they'll lose their earnest money. Other contingencies—such as those regarding a home that's uninsurable, inspection issues, a problematic title search, or a house appraisal that comes in too low—also protect a buyer by allowing the penalty-free canceling of a contract.
Mistake No. 4: Ignoring contract timelines
In some cases, the seller's real estate agent includes a timeliness clause with a hard date for closing, after which the earnest money is nonrefundable. Ensuring you stay on the schedule as written in your purchase contract can assist with not losing your EMD.
Mistake No. 5: Buying as is and not knowing the risks
A buyer who purchases foreclosed properties should be cautious putting down significant amounts for earnest money. A typical EMD for these properties is between $500-$1000. These properties are typically sold as is, so the sellers will stipulate that the earnest money deposit is nonrefundable. As a buyer, protect yourself by doing your due diligence before making an offer on such a property, because if you don't, you'll have to kiss your deposit goodbye if you decide to bail.
Mistake No. 6: Blindly voiding the contract
When a sale falls through, both the buyer and the seller need to sign a document voiding the sales contract. If a seller won't release all of the earnest money that a buyer feels legally entitled to, that buyer can refuse to sign the document and essentially make the home unsellable by putting a blemish on the title.
In other words, buyers should never, ever sign this contract unless they're sure the real estate seller's broker or a title company will give them back all of the deposit they deserve.
Mistake No. 7: Impulsively purchasing a home that’s not a good fit
This may seem like a no-brainer, but it's easy to get swept away by a home's cool features when you first see it. A buyer may put in an offer only to realize days later that the soaking tub may be fabulous, but the kitchen isn't functional. So do your due diligence, and make sure that you're 100% serious about buying a home before making an offer and submitting your earnest money.
Mistake No. 8: Not knowing when to let it go
Personal problems may be very serious to you, but they're not a valid reason to cancel a home purchase. And if you're bailing on a deal with no legal justification, fighting to get your earnest money back from escrow is probably a waste of time. Just accept that it's gone and move on.