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3 contingencies that can protect your earnest deposit money

You’ve diligently saved your money, and, after a robust search, you have found the home of your dreams. It checks all your boxes, and the seller just accepted your offer. The next step is to make a good faith deposit of earnest money as a part of your purchase agreement between you and the seller. This lets them know that you are serious about your intent to buy. It’s important to understand that an agreement of sale to purchase real estate is a legally binding contract. This means that unless you include contingencies in this contract, you may lose your earnest deposit money or even be forced to buy the house if you want out of the deal. There are, however, a number of contingencies you could, and should, include to protect yourself. Here are three of the most common:

Appraisal contingency

An appraisal contingency protects the buyer from agreeing to purchase a home for a much higher price than it’s actually worth. If it turns out that the property appraises for a much lower amount than the amount offered, sellers may reduce their asking price, buyers may choose to move forward regardless, or they can get back their earnest deposit money and walk away.

Financing contingency

This contingency sets a limit on how much time can elapse before the buyer must obtain financing for the purchase. If they are unable to secure financing within that time period, they must terminate the contract before the deadline or negotiate an extension with the seller. This limits the risk for the seller and means they can move on to another would-be buyer within a set time.

Inspection contingency

Also called a due diligence contingency, this sets up a time deadline for the buyer to obtain a home inspection and be satisfied with same. If significant repairs need to occur, the buyer may be able to negotiate a price reduction or ask the seller to make the repairs before the sale. The buyer could also accept the report and move forward with the original contract. The buyer might also decide to back out of the deal entirely. As long as the timeframe is honored, the buyer can have their earnest deposit money returned to them in the event of a canceled sale.

Buyers and sellers alike can include nearly any contingency they want in the purchase agreement as long as both parties agree to them. Once set into motion, the purchase agreement must be honored. If either party backs out of the contract despite the contingencies having been met, they are in breach of contract and at risk for litigation.

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