How Contract Contingencies Protect An Earnest Money Deposit

Posted on: 19 September 2017

Once a prospective home buyer decides to purchase a particular property, a purchase offer must be written out. Along with a written offer, the buyer usually submits a payment of earnest money to one of the seller's representatives. To minimize the risk of losing the earnest money if the sale never closes, home buyers can include protective contingency clauses in a purchase offer.

There is no set formula to determine how much earnest money to include with a purchase offer. However, a seller effectively removes their property from the market after they accept an offer, waiting for the proposed sale to close. The amount of earnest money a seller is willing to accept is often dependent on the robustness of the local real estate market.

In a slow real estate market, any reasonable offer is likely to be considered, even if it is accompanied by a small earnest money deposit. On the other hand, a seller in a more competitive market is likely to expect more earnest money with a purchase offer. Contract contingencies allow you to nullify a purchase offer and recover your earnest money if certain unforeseen circumstances arise.

Home inspection results

The most obvious reason to alter or nullify a purchase offer is if a major structural defect is discovered. To fully evaluate a roof, for example, someone has to enter the attic of the house. The entire underside of the roof must be inspected for any signs of discoloration from water leakage. An inspector may need to get on top of the roof to accurately determine its topside condition.

As with the roof, you may want someone to closely examine the structural foundation. The gradual settling of a building foundation is difficult to detect without a professional inspection. If the house has a crawl space, someone probably needs to visually inspect the underside of the flooring for any mold or wood decay.

Appraisal values

Making a home sale contingent on an appraisal ensures that you don't pay too much. A low appraisal value may also result in a mortgage loan denial. A contract contingency for appraisal value is probably acceptable to most sellers. However, contingencies for issues such as the interest rate on a mortgage are less likely to be received favorably.

With a properly written purchase offer, your funds remain safe as your home purchase moves toward the date of closing. Earnest money is typically held by either the seller's lawyer, the seller's broker, or the title company that insures the property. Contact a real estate specialist for more information about homes for sale in your area.