Earnest money deposit is basically the cash you offer to put down on a home you are interested in. Depending on where you live, you put down a % of the home’s purchase price as earnest money. In a highly competitive market, buyers are putting down large deposits to stand out. The earnest money remains in an escrow account or with the title company until the sale closes. If everything goes okay, that earnest money is put toward your down payment and closing costs.
In certain scenarios however, you may lose your earnest money.
1. You waived your contingencies
In highly competitive markets, it’s becoming more common for buyers to waive contract contingencies regarding financing or an inspection. You might be tempted to do the same-it will make you a more attractive buyer. But it also comes with serious risks. The financing contingency guarantees that you’ll get your money back if for some reason your mortgage doesn’t go through and you’re unable to purchase the house. The inspection contingency allows you to renegotiate the price or demand repairs if serious defects are found during the inspection. Most experts recommend that you do not waive the inspection contingency, unless you’re planning on tearing the property down.
As for the mortgage-financing contingency, waiving it may be the only way to compete with all-cash buyers. But you’ve got to be absolutely sure that you’ll be able to get approval from your bank.
2. You ignored the timeline outlined in the contract
Your contract usually sets out a specific time frame in which you’ll need to secure financing, get the home inspected, and be available for the closing. Generally speaking, as long as you’ve made a good-faith effort to adhere to the timeline, sellers will grant a reasonable extension if a lender drags his feet or there are other extenuating circumstances that delay things.
3. You have a change of heart
If you have a change of heart about the home you’re buying – but there’s no problem with the property or the financing – you will not get your money back.
Earnest money deposit serves a protection for the sellers when they take their home off the market. If late in the game you decide that you no longer want to make the purchase, they get to keep it as compensation for the time and money they have to spend on listing their home again and looking for another buyer.
Source: Beth Braverman, 9/16/15, realtor.com