Merit Real Estate

Causes for Forfeiting Earnest Money

forfeiting earnest money

There are 3 main causes for forfeiting earnest money deposit when buying a home. When entering into a purchase contract as a home buyer, a buyer agrees to execute specific timelines and terms. Failing to do so can lead to forfeiting their earnest money deposit.

Generally speaking, a purchase contract protects the buyer from being forced into buying a home that doesn’t meet their standards. Contract contingencies allow a buyer to terminate the transaction and retain their earnest money when these terms can’t be executed. Typical contract contingencies include inspections, loan approval, appraisal, clear title, and sale of the buyer’s current home. If all contingencies are met, the home buyer may not be able to terminate the contract without conceding their earnest money to the seller as “liquidated damages”.

Here are the 3 main causes of losing an earnest money deposit.

Not Meeting Deadlines

A real estate purchase contract specifies timelines and deadlines for satisfying terms and contingencies. There will be an agreed number of days for things to happen. These time-sensitive items include things like completing home inspections, finalizing the terms of the mortgage, and getting an appraisal.

If these contingencies are not met and removed from the contract by the specified deadline, the buyer could be at risk of losing their earnest money. When this occurs, the seller in the transaction may allow for more time to the buyer for contingencies to be removed. The seller also has the option of forcing the buyer to remove them in lieu of terminating the contract. If the buyer does not perform by removing contingencies, they will most likely forfeit the earnest money deposit to the seller.

Non-Refundable Deposit

Agreeing to a non-refundable deposit is not typical. This is a tactic that is often used by buyers when trying to make their offer more appealing in multiple offer situations. By making the earnest money deposit non-refundable, the buyer is forfeiting the deposit if any of the contingencies cannot be met.

Getting Cold Feet

A buyer may lose their earnest if they cancel the real estate transaction for reasons not covered by the contingencies. When a buyer gets cold feet after the contract has been executed, the seller is well within their right to retain the earnest money as damages for the time lost.

Bottom Line

Buyers are well protected by contingencies of the real estate purchase contract. Even though transactions occasionally fail, it is quite unusual for a seller to keep the earnest money.