Should You Lose Your Earnest Money? What Sellers Can And Can’t Do Regarding Your Deposit On The House

It usually is when the market is slow, and a seller has few buyers, or only one, that you will see more sellers wanting to try to keep your Earnest Money.

The Amount of the Earnest Money. When a buyer makes an offer they, they are required to put up “Earnest Money.” Many buyers want to know what the amount is; however, this isn’t the way you should be looking at it. You should look at it as, “how much money am i willing to lose?” The purpose of Earnest Money is to show the seller that you are making the offer “in earnest” and willing to proceed to closing. Do not write an Earnest Money check expecting to get it back should you change your mind. Sellers might keep the money and not give it back. Read: Understanding the Earnest Money Deposit

You should only write that check for an amount more than you are willing to lose, in case you change your mind about buying that house. The seller and seller’s agent may counter and ask for more, as they should if it is low. But don’t agree to an increased amount unless you are willing to lose that amount. 

Choosing Your Closing Agent (Escrow). In a Seller’s Market you will often see instructions from the seller’s agent regarding which Title and Escrow Company you are to use when writing an offer. In a hot market you likely won’t want to lose the house arguing over this point. But when your offer is the only one going for the seller long enough to feel comfortable that you can bargain in a reasonable manner, choose your escrow company wisely. See: The Facts About Earnest Money Deposits

Whether it is the Closing Agent or the Real Estate Broker holding your Earnest Money, you want to make sure that they honor unilateral rights to cancel before you agree to make out that check. See: Earnest Money Deposit FAQ’s. Sometimes the buyer has a unilateral right to cancel, but the escrow holder has an “internal policy” of requiring the signatures of both parties to release the Earnest Money. 

Pick not only your escrow company, but also speak with your closing agent before writing that Earnest Money check. If you have an Inspection Contingency, ask for the form that you would use to cancel based on the Inspection Contingency.

Do not rely on your Finance Contingency as a means to change your mind. Return of Earnest Money based on the Finance Contingency is rarely, if ever, covered under a unilateral rescission right, as are some other areas of the contract. Often if not always, the seller needs to agree to the release of Earnest Money if you are canceling based on the Finance Contingency. It’s a good idea to be sure you can get a mortgage before making an offer. Further reading: Understanding the Earnest Money Deposit

When you should lose your Earnest Money. If you change your mind about buying the house because you have now decided you don’t want it, the seller should keep your Earnest Money. That is the purpose of requiring Earnest Money. You promise to buy the seller’s house, and if you change your mind he gets to keep the Earnest Money. That is what Earnest Money is all about. 

Some will say the seller wasn’t damaged, so why should he keep my money? You have two elections in the contract. The seller doesn’t have to prove he was damaged, nor does he even have to be damaged. To talk about damages, you have to have been willing to risk more than the Earnest Money at the time you made the offer, and most people don’t do that.

So, should you lose your earnest money?

You will see more and more sellers wanting to keep that money than in the past; this is because buyers are not as easy to come by as they were in the last few years. Before you go to an attorney to get your Earnest Money back, maybe you should first look at yourself in the mirror and ask yourself if the seller should get to keep it. Because remember, Earnest Money is there to assure the seller that you are going to buy the home; if you don’t, understand that its not fair to them to lose a deal because you changed your mind.

One Comment on “Should You Lose Your Earnest Money? What Sellers Can And Can’t Do Regarding Your Deposit On The House

  1. admin says:

    Here is some more important information to take away from this article.

    Usually, buyers are required to deposit their earnest money within three days of reaching mutual acceptance with the seller. This may vary by deal and by location, but the earnest money deposit is usually the first big milestone after mutual acceptance, and buyers should be ready to make their earnest money deposit as soon as possible after mutual acceptance.

    If the sale is successful: the earnest money is applied to your down payment on the home purchase.
    If the sale falls through because of a failed contingency: you get the earnest money back without penalty.

    For most deals, cashier’s checks or wire transfers are the preferred methods of depositing earnest money. Some deals may allow personal checks or even credit cards to be used for earnest money deposits. However, we recommend you avoid using your credit card because of the negative impact it may have on your credit score; it can hurt your chances of getting a mortgage loan. If the buyer backs out of the sale for reasons not covered by a contingency: then the seller keeps the buyer’s earnest money.


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