Let's Talk About Earnest Money (and How You Can Lose It)

If you’re buying a home for sale in Long Beach or Lakewood, you’ll have to put down an earnest money deposit with your offer – but here are a few things you need to know first.


What is Earnest Money?


An earnest money deposit – sometimes called a good faith deposit – is a sum of money you come up with to show a seller that you’re serious about buying his or her home. It’s a negotiable amount, but it generally ranges between 2 and 5 percent of the home’s sale price. If you’re making an offer on a $500,000 home, your earnest money deposit could range between $10,000 and $25,000 – or it could be more, depending on whether you’re in a highly competitive market and there are other people clamoring to buy the house. (Talk to your Lakewood Realtor® about how much you should put forward as an earnest money deposit.)


Can You Lose Your Earnest Money Deposit?


You could lose your earnest money deposit. If the seller accepts your offer and you back out of the deal, you might have to forfeit what you put down – but not if you back out for a valid reason that’s outlined in your purchase contract.


Your agent will build in contingencies that protect you (and your earnest money deposit) when you make the offer. Contingencies can include:


  • Financing. If you’re unable to obtain financing on the home by a certain date, you might be able to get out of the deal.

  • Inspection. If the home inspection turns up something you can’t live with, you might have the right to terminate your offer.

  • The sale of your current home. You might need to sell your current home to use the proceeds as a down payment of your next home – or there could be other reasons you want this contingency built into your contract. Either way, if it’s there and you can’t sell your current home in time, you could have an easy “out” that lets you keep your earnest money deposit.


What Not to Do When You’re Working With Earnest Money


Don’t Offer Too Little


Be aware that you could lose your earnest money, but know that if you offer too little, the seller may not be able to take you very seriously.


Don’t Waive Contingencies


You can lose your earnest money deposit unless you have contingencies that let you back out of the deal safely. Your Realtor can tell you more about it, but never, ever waive basic contingencies. (If you waive the home inspection contingency and the home inspector finds out it’s infested with rats, falling into a sinkhole and infused with black mold, oh well… you could still be on the hook to buy it or risk losing your earnest money deposit.)


Don’t Buy As-Is Without Knowing the Risks


If you’re buying a foreclosure, which is nearly always an “as-is” sale, be careful – in many cases, the earnest money deposit is often non-refundable.


Don’t Get Cold Feet


You have to have a valid reason to back out of a transaction if you expect to hold on to your earnest money deposit. If you just get cold feet and there isn’t a specific condition in your contract that the home or the seller doesn’t meet (or that you don’t meet, if it’s related to financing or the sale of your home), you’re out a significant amount of money.


Are You Buying a Home in Lakewood or Long Beach?


If you’re buying a home in Lakewood or Long Beach, we can help. Call us at 562-882-1581. Tell us what you want from your next home and we’ll start searching for it right away.


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