When do I lose the earnest money I put down on a house?
For most Americans, the biggest investment and asset they own is their house. Buying or selling a house can be a joyful event, but also a stressful experience, especially for first time buyers. When you make an offer on a house, you sign a contract, and most realtors in Illinois use the Multi-Board Residential Real Estate Contract 7.0. Part of the offer is an earnest money deposit made in good faith to show the seller that you are a serious buyer with the ability and desire to purchase the house. The earnest money deposit is usually applied to your closing costs and the down payment to purchase the house. The question arises whether you can lose the earnest money deposit if the deal falls through.
As in most contractual cases, the real estate contract will govern whether or not you lose the earnest money. Most real estate contracts will have several deadlines that specify a timeline for certain events, such as an attorney review of the contract, the inspection of the property and obtaining lender approval of the loan with a clear to close on the property. It is your responsibility to meet those deadlines because if don’t and you ultimately cannot purchase the property by the closing date set forth in the contract, the seller can terminate the contract and you can lose the earnest money. It is important to read your contract carefully and follow the deadlines carefully.
Real estate contracts also have several contingencies that are designed to protect the parties to the contract, either the seller or buyer. For example, the parties may agree to a contingency to close on the property only if the buyer is able to sell their current home by a certain date. Another contingency is that the buyer must have lender approval for financing the purchase of the house by a certain date. In negotiating the contract, buyers may feel pressured to waive one or several contingencies to make the offer more competitive. However, waiving the contingency can increase the risk of losing the earnest money. In the examples listed above, the buyers may lose the earnest money if they cannot sell their current home to buy a new home, or if they cannot get financing approval to purchase the home. There are many contingencies that the parties can include in a contract or agree to waive, but it is important to carefully consider waiving a contingency because it may increase the risk of losing your earnest money.
As part of the contract negotiations, the seller may require a nonrefundable earnest money deposit, especially if the property is aggressively priced and marketed to sell. Although agreeing to a nonrefundable earnest money may make your offer more competitive, you are putting the earnest money at risk if you cannot purchase property. A buyer can also risk losing the earnest money if the buyer violates the terms of the real estate contract. The offer and contract submitted is an enforceable agreement, and the seller may seek to enforce the terms of the contract and require the buyer to forfeit the earnest money if the buyer breaches the contract. Buying a home is an exciting time in someone’s life, but it can also be intimidating.
Please contact the Real Estate attorneys at Bruning & Associates, P.C. at 815-455-3000 to schedule your complimentary consultation to discuss your home sale or purchase.
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