The money you bring to the table when you make an offer on a property, signals your intent to see the deal through. This finance will represent a good chunk of change and before you hand it over, there are steps you should take to safeguard your “earnest money.”
Eventually, the money will form part of the down payment. Depending on the locale, the state and the area’s property market, the earnest money can be anywhere from a few thousand dollars to up to 10% of the purchase price.
Once deposited, this good-faith gesture to the seller can’t be touched without written consent from both parties. This doesn’t mean you can’t lose your deposit should something go wrong but there are ways to safeguard your earnest money.
The loan contingency
A danger point for the buyer in any residential real estate transaction is if the property value comes in lower that the purchase price, when it’s appraised.
A loan contingency is one vital way you can safeguard your earnest deposit. If your loan broker can’t or won’t give you written confirmation that your loan has been approved in full, this contingency allows you to get out of the contract and have your deposit returned.
If you confirm that you’re approved and then find the lender has disapproved your mortgage because of a poor appraisal, you risk losing your money.
The appraisal contingency
Along with a loan contingency, you should have an appraisal contingency in place. If the buyer has a larger down payment, the mortgage may have been approved even if the appraisal is low.
This puts the purchaser at a distinct disadvantage. When the appraisal is less than the purchase price, this contingency allows the buyer to renegotiate or quit the contract.
The inspection contingency
Every house should have a property inspection before it’s sold. Without an inspection, you may be getting more than you bargained for.
A home inspection is carried out by a qualified professional who visually inspects the structure and components of a property. They perform an essential function that can help you identify and dodge major pitfalls in the home buying process.
It is the inspection contingency that can save the day if the inspection uncovers some serious problem or latent defect. Again, this puts the ball in your court. Depending on the severity of the problem, you have the choice of renegotiating or walking away from the deal, with your earnest money intact.
Dig into the seller’s disclosures
This last point can’t be covered by a contingency written into the contract.
Most real estate markets require sellers to complete a series of disclosures concerning their knowledge of and understanding of the property. The law obliges sellers to divulge property flaws, neighborhood problems, or anything that would negatively affect the property.
Usually, these disclosures and any local or state reports, like a building permit history, should be available for your review soon after your offer is accepted.
This is your chance to go over everything carefully and ask questions about your findings. If anything makes you uncomfortable or if something is unclear, investigate it. If you need it, ask for additional documentation because your deposit is at risk.
At some stage, you will have to sign off on the disclosures and reports. If you have discovered some red flags, this is where you can change your mind.
The sign off
The sign off usually occurs a few days before the formal closing and is a meeting where the buyers and sellers sign the final papers in the lead up to closing. In some states, closing and sign off happen at the same time for all the official paperwork.
Thousands of dollars are at stake
A buyer’s earnest deposit is a substantial sum of money that most people won’t want to lose. As you move through the purchase process, the one surefire way to safeguard your earnest money is to take your time and check every detail before your sign off.