The process of buying a home involves numerous steps, one of which is the submission of earnest money. Earnest money is a deposit made by the homebuyer during the initial stages of purchasing a home. It signals to the seller that the buyer is serious about the purchase.
Typically, if the home sale goes through, the earnest money goes toward the down payment or closing costs. However, in certain circumstances, you might find yourself losing this earnest money.
Backing out of the contract
If a buyer decides to back out of the contract without a valid reason covered by a contingency, they stand to lose their earnest money. The seller has the right to keep the earnest money as compensation for the time the home was off the market.
Not meeting financing deadlines
A common contingency in real estate contracts is the financing contingency, which allows the buyer to back out if they cannot secure a mortgage. However, if the buyer fails to apply for a mortgage in a timely manner as outlined in the contract, or if the buyer’s financial situation changes and they no longer qualify for a mortgage, the buyer could lose their earnest money.
How to protect your earnest money
To avoid losing your earnest money, ensure that you fully understand all the terms of the contract, especially the contingencies and their deadlines. It is also important to keep your finances stable during the home-buying process to avoid issues with your mortgage application.
If you are buying a home, it is important to understand the risks and take steps to mitigate them. By knowing what to do, you can protect your earnest money and help ensure a smoother home-buying process.
