First-Time House Buyer? Dealing With Earnest Money Legal Issues

Are you buying a house for the first time? If so, you've probably been learning all the ins and outs of the different contracts you'll have to sign. One of the contracts you'll have to enter into deals with earnest money. Read on to learn what earnest money is and how to avoid legal issues if you or the seller breaks the contract.

What is Earnest Money?

Like the name states, earnest money shows the seller that you are earnest about buying their house. This sum of money is usually 1 or 2% of the overall house price and can be used towards your down payment.

Earnest money is important because it acts as collateral for the seller. If you decide to take back your offer on the house, then the seller is usually allowed to keep the money. However, there are some instances where you may be able to get your earnest money back.

In What Cases Can You Get Your Money Back?

If the seller is the one to break your contract, then you as the buyer have a right to get your money back.

However, there are legitimate reasons as to why you'd need to break the contract but still get the earnest money as well. A contract should outline any worst-case scenarios as to why you'd need your money back; and, your lawyer will make sure that your money is held safely in escrow until all of the contractual obligations are met.

What's an example of a worst-case scenario? Well, if the home inspection reveals faulty structural components (e.g. cracked foundation, asbestos, old electrical system, etc.) and the realtor didn't inform you of them, then you have every right to withdraw from the contract and get your money back.

Another worst-case scenario that you might face is failing to get a loan by a certain date. If you aren't able to secure a loan for the house, then you may need to withdraw from your contract.

The important thing to remember is that you need to have these worst-case scenarios in writing. A lawyer is vital to this process since he or she will know which scenarios will apply to your situation and allow you to exit from a contract without being sued.

When Would the Seller Get to Keep the Earnest Money?

Unless a scenario is outlined in your contract, the earnest money usually defaults to the seller if you withdraw from buying their house. Why is this the case? When you break a contract, the seller will be the one that is experiencing most of the financial loss, since they are keeping the house on the market and paying for it until the closing date. Also, the seller may experience some loss because he or she missed out on potential buyer while you were both still in contract.

As you can see, the earnest money is a really a small fee that can minimize risk for both parties. While some sellers may be satisfied with keeping just the earnest money, others could pursue legal action against you if you get the earnest money back. In some states, the seller can either sue for actual damages or keep the earnest money, but he or she cannot do both thakfully! However, each state is different, so it's best to consult with a lawyer, like Greenberg Walden & Grossman, when drawing up your contract.