Warn Buyers: Earnest Money Mistakes to Avoid

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Real Estate

Once a buyer settles on a home, they often show their commitment with an earnest-money deposit. But if they’re not careful, they could lose thousands of dollars.

Here are the do's and don'ts:

Failing to understand exactly what an earnest-money deposit is.

It is proof that a buyer is committed to completing the sale. Earnest money is used as credit toward the down payment and closing costs. It’s often a negotiable amount between the buyer and seller and usually about 1 percent to 2 percent of the purchase price, although it could be much higher.

Not offering up enough.

When a market is competitive, offering more earnest money may be one way to get your offer to stand out. Real estate pro Robyn Porter in the Washington, D.C., metro area advises her clients to offer an earnest-money deposit that will get attention. For example, on a $500,000 home, in a competitive market, she’ll recommend the buyer offer up $20,000 to $25,000, or up to 5 percent, depending on the competing offers. But she is also careful to warn her buyers that their deposit money could be in jeopardy if they default on the contract.

Removing contract contingencies.

Jeremy Colonna of Matchpoint Funding says he’ll see buyers agree to remove a loan contingency and then if their loan falls through, they could lose their earnest money. “Never give up your right to cancel your purchase until you are 100 percent certain that you’re going to be able to close,” Colonna says. Watch for giving up other contingencies, like waiving inspection issues, appraisal issues, or problematic title searches.

Not abiding by contract timelines.

“Ensuring that you as a buyer say on the schedule dictated by a contract can assist with not losing your earnest-money deposit,”