Buying a home is an expensive process. Modern mortgages are more flexible than those issued in prior generations. Most people don’t need to come to the table with 20% down. However, they do need a small down payment, much of which might serve as their earnest money.
A buyer’s earnest money is liquid capital that represents their sincerity regarding the offer they made. The earnest money goes toward the purchase of the home. However, if the buyer cancels the closing, the seller may have the option of keeping some or even all of the earnest money. The buyer might then struggle to proceed with their plan to purchase a home because they no longer have the funds necessary.
How can those making offers on real property limit the likelihood of losing their earnest money funds?
Contingencies can protect earnest money
Contingencies are essentially contract inclusions that impose limitations on the proposed transaction. The buyer essentially reserves the right to cancel the transaction and preserve their earnest money in certain scenarios.
Financing contingencies are common. If challenges arise that prevent people from actually securing a mortgage after making an offer when they had pre-approval, a financing contingency allows them to move on without losing their earnest money.
Contingencies related to inspections and appraisals are also common. If a professional assessment of the home causes complications, the buyer may be able to cancel the transaction.
Inspection contingencies may allow buyers to back out of a transaction when there are previously undisclosed issues with the property that affect its value or their ability to use it as intended. Appraisal contingencies are also common. If the appraisal comes in low, that could affect financing.
In scenarios where the property also includes acreage, a survey-related contingency might be necessary if there are issues with the previously-stated boundaries. Buyers may even choose to include a sale contingency that gives them time to list their home and close on its sale before they move forward with the transaction.
Contingencies do sometimes serve as a minor deterrent to sellers when they review offers, but the protection they offer outweighs any setbacks caused by seller reticence in most cases. Drafting custom offer documents with a real estate lawyer can help people protect themselves as they prepare to complete residential real estate transactions.