3 Ways You Can Lose Your Earnest Money

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It is common practice throughout the country to make an earnest money deposit when signing a contract for a real estate transaction.  By making this deposit, you are assuring the seller that you are a serious buyer and will risk losing the deposit if you default on the contract.  It is not a guarantee that the earnest money will be deposited if the buyer backs out.  

An article published by realtor.com highlighted the most common reasons buyers lose their earnest money deposit:

  1. No Contingencies.  It is crucial when writing a contract to include basic contingencies to protect your deposit.  The inspection and mortgage contingencies are the two most common as they protect the buyer In the scenario that you do not approve of issues revealed by an inspection or if you are unable to secure financing, However, as realtor.com points out,  in a hot market or when competing against an all cash offer, a buyer may remove contingencies to remain competitive and sway the seller.  This is very risky as there is little room to back out once the contract is signed.
  2. Missing a Deadline.  I see this happening all the time.  There is so much going on as the buyer is balancing buying a home, working a full time job, and raising a family and he/she forgets to ask for an extension to get approved for a loan. If the loan goes bust, than the buyer is out of luck. The real estate contract is filled with expiration dates and it is very important for both the buyer and Realtor® to set numerous reminders of each important date.  The buyer only has a specified amount of time to conduct an inspection, have their attorney request revisions, and obtain financing.  Missing a deadline will put the buyers earnest money at risk if they are unable to close on the home.
  3. Cold Feet. The inspection went well and the lender just issued a clear to close and closing is scheduled in 3 days.  And then you suddenly decide that you don’t want to buy this property after all. Or a better property came on the market.  Think twice before backing out because you will lose your earnest money.  It is noteworthy to point out that in many contracts, it states that in addition to losing the deposit, a seller may sue a buyer for damages if he breaches the contract.

It is always better to be safe than sorry. Stay in constant contact with your Realtor and attorney throughout the process to make sure you are protected.  If any issues arise that may jeopardize the deal, call your attorney immediately!

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