Top 10 Reasons a Buyer Loses Their Earnest Money
When a home buyer brings an offer on a home, they are required to deposit something of value as a form of consideration for the purchase. That deposit is called earnest money. 99.9% of the time we’re talking real money. Not sheep, not an antique tuba and not your dad’s Harley Davidson...although some sellers may be happy to take it. The amount of earnest money has to be agreeable to both parties, but the rule of thumb is 1% of the purchase price. Thus, if the buyer is making an offer on a $200,000 property, the earnest money will most likely be $2000.
When working with a Realtor this money is held in a trust account at a Brokerage and is credited to the buyer at closing. In very, very rare circumstances a seller may allow a “promissory note” for a short period until the buyer can come up with the necessary funds. There comes a time when the buyer takes an action or does something detrimental to the transaction that prevents it from closing due to no fault of the seller. That’s when they lose the earnest money that has been deposited. This money is meant to reimburse the seller for removing the property from the market, possibly losing marketing time and to cover out of pocket expenses they may have incurred on behalf of the buyer.
Even the best buyers with the greatest of intentions make mistakes. It is truly heartbreaking to see a family that only a day ago was well qualified to purchase a home suddenly find themselves not only in a position of not buying a home, but being out the earnest money they deposited. It’s a double whammy. OUCH!
If you are looking to buy a home, here are our ways to not lose your earnest money.
1) DO NOT CHANGE JOBS, BECOME SELF EMPLOYED OR TAKE A PROMOTION
Now is not the time to leave the construction job you’ve had for seven years to start a poodle grooming business. Your lender wants to know that you are good at what you do and will continue to do so for some time. New jobs, career changes or promotions that have “trial periods” are a major red flag. The lender considers you untested in the new position and may require 18 months to 2 years of good solid performance before they will lend to you.
2) DO NOT BUY A CAR, TRUCK OR ATV
Your credit is heavily weighed on the age of the line of credits that you have, your total debt to income as well as the amount of revolving credit that you have available. You will most likely find that if you purchase an automobile you will have to live in it since you won’t be buying a house.
3) DO NOT USE CREDIT CARDS EXCESSIVELY
Now is not the time to go to Vegas and run up the credit cards playing blackjack or hitting the slots. This can affect your credit the same way buying a car can, even if you intend to pay it back within 30 to 60 days.
4) DO NOT MAKE LARGE CASH DEPOSITS WITHOUT CHECKING WITH YOUR LENDER
You are most likely a wonderful law abiding citizen. However, an investor is about to lend you a lot a money and they are VERY suspicious of any cash deposit over $500. They will want proof that it’s not a loan (this would affect your debt to income ratios) and/or that the money was not obtained through illegal behavior. If you sell something to come up with cash, you better have a valid receipt signed by both parties. If it’s an automobile or ATV the lender may want to see a copy of the title before and after the sale to verify it’s transferred ownership. Just remember to call your lender first before you deposit the cash and make sure that the proper documentation is in place.
5) DO NOT ORIGINATE ANY INQUIRIES INTO YOUR CREDIT HISTORY
Those awesomely funny commercials about how to get a free credit report are not your friend. If you want to know your credit score, ask your lender.
Your lender’s inquiry does not hurt you and they are required to provide you a copy if you ask. Also, many of the “Free Credit Report” services do not use the same algorithm to calculate your score that your lender uses, thus they are not providing you accurate information.
6) DO NOT SPEND MONEY YOU HAVE SET ASIDE FOR CLOSING
If you get to closing table and you are short some cash because you spent the money on wholesale hair products or a case of rubber chickens, that is NOT the seller’s fault. If you can’t close, they will gladly keep your earnest money to cover damages.
7) DO NOT CO-SIGN ON A LOAN WITH ANYBODY
You might as well marry them. You are basically equally responsible for the debt. Here is a true story: John B. puts his house on the market. The buyer makes an offer and the house is now under contract. John B. then puts an offer on his dream home. He deposits $3000 in earnest money. One week before the scheduled closing of both sales, John is informed by creditors that his daughter used her “emergency” credit card to go to Vegas and max it out, then not pay for over 30 days. His financing falls apart. He loses the $3000 on his purchase, is out the cost of the appraisal, the repairs and other expenses on the sale of his primary residence, PLUS has to pay the buyer back for their home inspection and other out of pocket expenses. Not cool. Don’t co-sign for anybody, no matter how cute they are.
8) DON’T WAIT OVER 72 HOURS TO TERMINATE IF YOU HAVE A DISCLOSURE CONCERN
Most contracts state that once you discover something detrimental to your decision to purchase, you have only 72 hours (unless mutually agreed otherwise in writing) to terminate the contract. Otherwise, it is presumed that you are OK with the defect and have elected to proceed. If you wait longer than that and then try to terminate, the seller has the right to retain your earnest money. There is a reason that amendments are dated and time stamped.
9) READ YOUR CONTRACT CAREFULLY
If you are purchasing a HUD property or an REO (bank owned) you need to read the fine print! Many lenders have a non-refundable earnest money deposit. It’s usually much lower than the 1% of the purchase price, but it’s still a bummer you lose it. Also, many sellers will make the earnest money non-refundable after the requested repairs and appraisals are complete.
10) USE A REALTOR
Realtors will protect your earnest money by depositing it in a trust account and those funds are not released unless both parties agree to the outcome. The exception is if there is a dispute and it goes to the broker for review. Even then either party can request mediation with their local Board of Realtors. This is much cheaper than hiring attorneys and going to court. In any event, if you are buying from an unlisted seller, be very careful about who is going to hold your earnest money. What happens if you the seller is in a car accident or some other tragic circumstance and they can’t complete the sale? What will you do while they sit on your deposit? If you have a Realtor, they have access to your funds and refund your earnest money with broker approval.
As you can see, there are many things to consider. Here’re the brass tacks: Selling a house is the easy part. The real value of a great Realtor is when the property is in a contract. Working with experienced professionals can save you money, time and prevent more sleepless nights than you know.