One of the most anticipated moments in any would-be homeowner’s life is the moment that a bid on a house is accepted by the seller. Once that happens, however, you’ll quickly be asked to demonstrate your sincere interest by putting down a little “good faith” money.
That deposit, which is usually put in escrow until the deal is closed, is called your earnest money. Essentially, it allows you to put a hold on the property while you go through the process of having an inspection done on the home and any other steps that need to happen before closing — without fear that someone else will buy it out from under you.
Sometimes, however, things don’t go as planned. You may have a problem, for example, getting your financing through the bank within the time frame agreed upon with the seller. Or, perhaps you will discover some massive flaws with the house that will cost more to fix than you care to spend. Maybe the seller will simply have a change of heart and back out.
Depending on the market where you plan to buy, the earnest money that’s required can be relatively modest — as little as 1% of the sales price — or it can be fairly steep (especially if you want the seller to accept your bid over someone else’s). If the deal falls through for any reason, that money has to be returned according to the terms of your contract.
Generally speaking, if the seller cancels the deal, your earnest money gets returned in full. If you cancel the deal based on a contingency that was written into the contract (such as ensuring that the property passes a home inspection), your money will also be returned. If you break the contract for any other reason (like deciding the house isn’t really what you want), you will likely lose your money — which can be a significant loss if the property is pricey.
If you’re leery about a home purchase don’t put down your earnest money until you fully understand the real estate contract you’re being asked to sign.