These 3 Tips Will Help You Protect Your Earnest Money

Celeste Huss
Published on August 1, 2016

These 3 Tips Will Help You Protect Your Earnest Money


The required amount of earnest money varies depending on the local real estate market and the state itself. Here is Cache Valley it ranges from $500 to 1% of the purchase price and it is up to the seller to accept the amount offered or ask for more.

The earnest money shows the seller that you are serious about purchasing their property. Usually those funds are deposited at your real estate agents office and can be released back to you upon your written notice. They can also be held at the buyer’s or seller’s title company and they cannot be refunded without written consent of both the buyer and the seller if deposited there. As the transaction comes to a close the funds are credited towards your closing costs and/or down payment.

Just like the terms and price of the property, the amount required for the earnest money is negotiable. However, it will not be popular with the seller if you put down much less than what is customary in the local market.

You can get your earnest money back, but you can also lose it if you are not careful. Below are three top tips to protect your earnest money.

Know the property

Every house, whether a new build or a existing home, should have an inspection before being sold. You should also include a contingency in your contract to ensure that you are covered in the event of any unpleasant or costly discoveries.

An inspector will examine everything from the roof to the foundation. Specialist inspectors can be called in to look for any pests, such as termites, or to go over the heating and ventilation systems. Even brand new homes should be thoroughly inspected.

If the inspections reveal any issues, you will need to decide whether to pull out of the deal or proceed. Inspection contingencies are often quite vague and allow the buyer some room to withdraw from the deal and have the full amount of their deposit returned.

Written loan approval and appraisal contingency

You will need written proof of your loan approval, and you will want to make sure the property is not appraised for less than the price you agreed with the seller.

You should include a contingency clause that allows you, the buyer, to receive written confirmation of loan approval before progressing with the deal. If for some reason, your loan is denied you can walk away from the deal with your deposit returned to you in full.

Make sure you keep this contingency in place, even if you are struggling to get written loan approval from your lender. Loan providers can, and have, withdrawn funding at the last minute. Make sure you keep in close contact with your loan provider, and if necessary request an extension from the seller. If you sign off that you have been approved a loan and are later denied funding, you risk losing your earnest money.

You should also include an appraisal contingency. If the property is appraised for less than the agreed price with the seller you should keep the right to walk away from the deal with your earnest money intact, or at the very least renegotiate the agreed purchase price with the seller.

Go over the property disclosures

Most real estate markets require the seller to compile a list of disclosures that show the seller’s knowledge and experience of owning the property. They are required by law to reveal any defects, faults, or location issues that have or could have a negative impact on the property.

You should also have an opportunity to review any public records and reports, such as the building permit history or environmental hazard maps.

After your offer is accepted, you should be sent the list of disclosures. If you don’t like anything revealed by these disclosures, this is your opportunity to pass on the property and withdraw from the deal.

You will need to sign off on these reports and disclosures, so make sure that you thoroughly go over the information and proceed with caution. Your earnest money will be at risk once you sign off, so make sure you ask questions, request additional documentation or reports, and carefully investigate anything that concerns you about the property.

Your hard earned cash is on the line

Depending on the price of the property, the buyer’s earnest money can be a considerable sum. If a property costs $400,000, a one percent deposit would amount to $4,000. So make sure that you proceed with caution and protect your earnest money as you progress towards closing on a property.

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These 3 Tips Will Help You Protect Your Earnest Money
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