If you’re like many people, you know that an earnest money deposit is important when you’re buying a home – but you may not know what it’s for, where it goes, and the mistakes that could cause you to lose your hard-earned cash. Here’s the scoop on earnest money deposits… and three sure-fire ways to lose them.

3 Sure-Fire Ways to Lose Your Earnest Money Deposit

An earnest money deposit is a sum of money you put up to show a seller you’re serious about buying. It makes the seller feel comfortable taking their home off the market. 

Here’s how it works:

  • You and your REALTOR® come up with a dollar figure to show a seller that you’re a serious buyer. Usually, it’s between 1 and 5 percent of the home’s sales price.
  • You give that amount of money to a third-party escrow company through your REALTOR. (You never give an earnest money deposit directly to a seller.)
  • The escrow company hangs on to that money while your transaction is pending.
  • At closing, the earnest money deposit is applied to your down payment or closing costs. 

How Can You Lose an Earnest Money Deposit?

You can lose your earnest money deposit by:

  • Waiving contingencies in your contract
  • Missing deadlines in your purchase contract
  • Changing your mind about the home 

Here’s a closer look at each. 

Waiving Contingencies in Your Contract

#1. Waiving Contingencies in Your Contract

Your REALTOR will build contingencies into your real estate purchase contract. Contingencies are conditions that you or the seller have to meet in order for the deal to go through. The most common have to do with appraisals, financing and inspections. If you waive those contingencies, your offer might be more attractive to the seller – but they’re there to protect you. If you’re unable to purchase the house or you discover a serious defect without a contingency there to protect your earnest money deposit, you can kiss that cash goodbye if you walk away from the deal. 

Related: Why you need mortgage preapproval before you start looking at homes

Missing deadline

#2. Missing Deadlines in Your Purchase Contract

Your purchase contract has very specific timelines. In fact, you’ll likely see one or more “time is of the essence” clauses in your contract; if you fail to meet the deadlines, the seller can say that you breached the contract – and that means you failed to uphold your end of the deal. In a case like that, the seller will most likely be able to keep your earnest money deposit, put the home back on the market, and send you right back to square one in your home search.

Related: 5 things to get rid of before you move

#3. Changing Your Mind About the Home

Getting cold feet? Think twice if you’ve put up an earnest money deposit. If you back out of the deal for a reason other than an unmet contingency in your contract, the seller is likely to be able to keep your earnest money deposit.

Related: 5 tips for moving with a cat

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