Buyers often save aggressively to have an adequate down payment for a home. While 20% is no longer a standard expectation, people still generally need thousands of dollars in liquid capital to qualify for a mortgage. Mortgage funds are another key aspect of a real estate transaction. The money transferred by a mortgage lender pays off any existing liens and provides compensation for the seller.
Buyers typically also need to make an offer backed by earnest money. A buyer’s earnest money is part of what they saved for their down payment. Buyers usually deposit between 1% and 3% of the offered price for the property as earnest money.
The goal is to establish that their offer is sincere. If something changes and the buyer decides to cancel a closing after the seller accepts their offer, do sellers get to keep the earnest money?
Earnest money is vulnerable after a closing cancellation
The terms of the offer that the buyer made and the purchase agreement they finalize with the seller determine how vulnerable their earnest money is. The point of earnest money is to limit the risk that the seller incurs by accepting an offer and effectively taking the house off of the market.
If the buyer cancels the transaction without justification or legal protection, then the seller could retain some or all of their earnest money as compensation for the inconvenience and costs associated with that change of heart. Buyers typically need to protect their earnest money. They do so by including contingencies in their offer and ensuring those contingencies carry over to the purchase agreement.
Contingencies are essentially protective clauses built into a real estate agreement. If certain circumstances arise, the buyer can cancel the closing without risking their earnest money. It is common for buyers to include contingencies related to the outcome of the inspection or the value returned by the appraisal.
Financing contingencies are common as well. If something happens that prevents the buyer from securing the mortgage, a financing contingency allows them to at least reclaim their earnest money.
Frequently, those preparing for real estate transactions may need help protecting themselves when putting together a reasonable offer. Learning about the financial vulnerability that comes with making an offer can help people see the value of protecting themselves during a residential real estate transaction.
