Once a buyer settles on a home, they often show their commitment with an earnest-money deposit. But if they’re not careful, they could lose thousands of dollars.
When 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 deposits that home buyers can make.
Failing to understand exactly what an earnest-money deposit is
Earnest Money is proof that a buyer is committed to completing the sale. Earnest money is used as credit toward the down payment and closing costs. It’s often a negotiable amount between the buyer and seller and usually about 1 percent to 2 percent of the purchase price, although it could be much higher. This money is generally held by the seller’s broker or the escrow company, to be used as a credit toward the down payment and closing costs.
Not offering up enough
When a market is competitive, offering more earnest money may be one way to get your offer to stand out. Real estate agents frequently can advise clients to offer an earnest-money deposit that will get attention. For example, on a $500,000 home, in a competitive market, it can be recommended that the buyer offer up $20,000 to $25,000, or up to 5 percent, depending on the competing offers.
Bottom line for buyers: Weigh losing the earnest money against the possibility of losing the home.
If a high earnest-money deposit scares you, remember you’ll have to come up with the down payment 30 to 45 days after making an offer, anyway. The EMD is just a way for a buyer to pay part of the down payment upfront. On a $500,000 mortgage, a 15% down payment is $75,000, so a $25,000 EMD shouldn’t be a hard pill to swallow.
Removing contract contingencies
Sometimes buyers agree to remove a loan contingency and then if their loan falls through, they could lose their earnest money. Never give up your right to cancel your purchase until you are 100 percent certain that you’re going to be able to close… be sure you are pre-approved by your lender’s underwriting department. Watch for giving up other contingencies, like waiving inspection issues, appraisal issues, or problematic title searches.
Not abiding by contract timelines
Buyers must stay on the schedule dictated by a contract, or they can unwittingly breach their sale contract and lose their earnest-money deposit. Trust your Realtor to guide you through this… it’s her job.
Buying ‘as is’ and not knowing the risks
“As Is” properties typically will have the sellers 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 EMD goodbye if you decide to bail. The same is true in a multiple offer situation where, to strengthen a buyer’s offer, all contingencies are waived. It’s always ‘Buyer Beware.’
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 make sure that you’re 100% serious about buying a home before making an offer with an EMD.
If you get cold feet and back out, it’s more likely that you won’t get your money back.