Buying a House? 3 Ways to Lose Your Earnest Money Deposit

Many first-time buyers don't know the financial obligations involved in buying a house. With so much emphasis placed on saving for a down payment, some people don't fully understand all other financial aspects of the transaction, including the earnest money deposit. I encourage all buyers, first-time or otherwise, to understand what an earnest money deposit is — and how you can lose it when buying a house.

What is an Earnest Money Deposit?

When you place an offer on a home that the seller accepts, you're laying the foundation for the entire transaction. As a part of the purchase offer, the buyer commits to a financial obligation. The earnest money deposit, also called an escrow deposit or good faith money, follows the signing of the sales contract or purchase agreement. The amount may be between 1 percent and 10 percent of the sales price. The contract outlines if and when a buyer may seek a refund for this deposit.

How can you get a refund for your earnest money deposit? One example may be if the house doesn't appraise for the sale price, the buyer can stipulate a contingency that they can take back their deposit. How can you lose your earnest money deposit? It's easier than you may believe. There are three surefire ways to lose your earnest money deposit when buying a house:

1. You've got cold feet and want to back out of the sale.
   Buying a house is a huge commitment — a commitment that a small percentage of buyers don't fully understand until they've signed the purchase agreement. Backing out of the sale of a home simply because you've reconsidered your personal decision is not permitted.
2. You've waived away your contingency rights.
   When you're buying a house, always read and understand the stipulations of the contract. Real estate agreements often have contingencies included, like allowing you to remove yourself from the sale and retain your earnest money deposit if the inspection fails or if there are financing issues. Some buyers will waive these rights to make their offer appear more attractive to the seller. For example, if the inspection were to fail or if the house is appraised for less than it's listed, you'll either need to complete the sale or lose your deposit if you've waived the contingency rights.
3. You've neglected the agreed-upon timeline according to the contract.
   Your purchase agreement will include a number of new responsibilities that you must tend to within a specific time frame. This includes securing financing from a mortgage lender, completing a home inspection, getting an appraisal conducted, and setting availability to schedule closing. While some sellers will extend these time limits within reason if requested, you're contractually obligated to meet these demands, or you can forfeit your earnest money deposit.

Buying a house is one of the most significant decisions and investments you'll make in your life. While it is common to have some uncertain thoughts in this process, you should also keep in mind that you are responsible for keeping up your end of the bargain — morally and legally.

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