Earnest money is a great way to show a seller you’re serious about the offer you’re making on their home. What is earnest money? Earnest money is a deposit from a buyer to a seller representing a buyer’s ‘good faith.’ The deposit is a way for the buyer to receive extra time to get financing and conduct the title search, property appraisal, and inspections before closing.
By placing this deposit down to demonstrate your commitment to follow-through on the contract, you’re saying, “I love this home, and I’m ready to commit.” But there’s a real risk involved: If you make a mistake, you might lose your deposit and be out of a chunk of cash.
Here are some ways to avoid burning your home-buying bankroll in lost earnest money:
- Make sure it’s the home you want. Seem obvious? Sure. But it’s easy to get swept up in the moment. Recognize that you’re about to enter into a legally binding contract and that the money you’re risking will hurt if you change your mind. While you may not be able to drag your feet on the decision, check your gut to see if any reservations are lurking there before you go all in.
- Don’t sacrifice contract contingencies. Don’t let your desire for a home cause you to blindly remove contingencies that are built into contracts to protect buyers. Common ones include loan contingencies, title search issues, appraisal, and insurance obstacles. Waive these at your own peril.
- Avoid committing to a home “as is.” If you’re putting earnest money on an offer for a foreclosed home, don’t be too eager to accept any home problem. Take the time to understand the home’s issues before you write the offer.
- Read the contract timelines. Look at closing dates and other dates related to the process leading up to closing. Violating the timeline could cost you your earnest money as well.
- Ensure you have recourse to get some or all of your earnest money back. If the sale doesn’t finalize, you and the buyer will need to sign a document voiding the agreement. Please don’t sign this until you understand how it will impact your earnest money refund. The seller’s title can be negatively impacted if you don’t sign off, so keep your leverage handy until you’re sure you are satisfied that you have been treated fairly.
Protect yourself and your down payment by playing smart with your earnest money. If you have questions or concerns, ask your agent to help you understand everything in plain language!
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