When you are purchasing a home, most sellers require an "earnest money" or "Good Faith" deposit to consumate the contract. It's usually $500 - 10% of the purchase price. If your sale goes through, the deposit is credited to your down payment at the Act of Sale or Closing. A large deposit tells the seller that you are serious about purchasing their property. It can increase your chances of getting your offer accepted over a similar offer from another buyer.
To the Seller, it ensures that you will fulfill your end of the contract. For example, if you don't close on the sale for a reason not outlined in the contract, the seller is allowed to keep the deposit as compensation for removing the property from the market to allow you to purchase it.
But what if you have a good reason for not closing? Can the seller keep your deposit? Yes and No. Yes, if your reason for closing is not covered in the contract, the seller can claim the deposit. Some of the covered exceptions include:
- your loan is denied within the contract covered period
- the property does not appraise for the sales price
- your home inspection finds items the seller is unwilling to repair
- there are title issues that prevent you from taking title
- a party to the contract dies or becomes legally unable to execute the contract
But here are 4 reasons why the seller could claim your deposit and how to prevent them:
- After inspecting the property, you discover problems that make you change your mind about the purchase. If you haven't completed inspections within the time period allowed in the contract, the seller can keep the deposit if you back out of the contract. Contracts usually allow a period for you to have the property professionally inspected. It's customarily the 1st 7-10 days after your offer is accepted in writing. This inspection period is also known as due diligence. To avoid risking the loss of your deposit, you must schedule all inspections immediately! Good home inspectors' appointment calendars fill up quickly and if your agent doesn't have a good rapport with them to get you in, you could miss the important contract deadline. Even if you get the appointment, if the inspection report, or your request for the seller to remedy problems
- Your loan is not approved, but the lender doesn't reject the loan before the contract loan approval deadline. Contracts have a Loan Approval deadline that lenders often disregard. A competent Agent will check on the loan approval status and get an extension for the loan approval from the seller. But its important that you also monitor your contract deadlines to make sure your lender is abiding by your contract.
- your loan terms change and the changes are unacceptable to you, but you are still approved for the loan. This is a very common mistake but easily prevented. It usually occurs when you find out that your homeowners or flood insurance prices are much higher than you anticipated and therefore your house payments will be higher than expected. Or the mortgage interest rates rise before your loan is locked. You feel that the mortgage payments are out of your comfort level but the lender approves the loan based on your credit and income anyway. Since you have loan approval within the contract specifications, you are breeching the contract and the seller can retain your deposit. To avoid this very common mistake, your agent should help you get insurance, tax, HOA,utilities and parish tax assessments during your inspection period. The inspection period, also known as due diligence, gives you a time period to back out of the sale without risking a loss of your deposit.
- You get approved but don't close by the contract closing deadline. The closing date in the contract is not a suggestion. If the lender or title company is not ready, you must get a written extension to close the sale. A good agent will check the status of your loan at least 10 days before the contract closing date and request a written extension if needed.
Good Faith deposits are your hard earned money! Don't lose it. You have been warned.