In real estate, the importance of being earnest is measured not by a handshake and a "Sure, we'll buy your house," but cold hard cash -- aka earnest money. That's the deposit that you, dear home buyer, put down once you agree to purchase a place (typically 1% of the home's price) and that you stand to lose if you back out of the deal for no good reason.
While this safeguard serves to keep fickle buyers from changing their minds unnecessarily, there are plenty of times when you can -- and should -- bail with your earnest money firmly in hand.
Here are six good reasons to walk away that won't force you to forfeit this chunk of money.
1. The house was appraised for less than expected
One surefire way to get your earnest money back is to have an appraisal contingency. Your lender will want to have the property appraised to see if it's really worth what you agreed to pay for it. If the estimate is lower, the lender will loan only up to the lower amount -- which means it's up to you to cover the difference. But with an appraisal contingency, "the buyer only has to buy the home at the appraised value," says Joshua Jarvis, a Realtor in Atlanta.
An appraisal contingency gives you leverage to ask the seller to lower the price or to sweeten the deal by, say, paying your closing costs. But if no agreement is reached, then you can take your earnest deposit and skedaddle.
2. Your financing fell through
If you can't find a lender who will loan you money within a certain amount of time, a financing contingency allows you to get your money back. Normally you have to be flat-out denied financing by the lender in order to get a refund; in other words, you can't bail scot-free because you didn't like the interest rates offered.
A typical time frame to find financing is "often two weeks from date of the approved contract," says Doris Phillips, a Realtor and broker with Lake Homes Realty in Pelham, AL.
3. Your other house didn't sell
It's hard to buy a home if all your money's tied up in your old one -- which is why many buyers in this all-too-common scenario have a sale contingency in their contract: They will buy the new place only if they can unload their old digs within a specific amount of time. How much time that is depends on how quickly homes move in your market, so consult your Realtor for more specifics. But the nice thing is, as long as you've got this contingency in place, if your old home doesn't sell, you can back out of your new purchase without losing anything but time.
4. You find out the home has a major flaw
Most sales are contingent on a home inspection -- that's where an inspector checks out the house, soup to nuts, and identifies any problems. While many flaws can be fixed and the deal can go through, there are some doozies that should give you major pause. They include a history of problems with mold, foundation, electrical, pollution, and flooding. If your home inspection unearths these problems, you can either negotiate to pay a lower price (since you'll have to pay for repairs) or abort the mission and take your earnest money with you.
Also keep in mind that sellers are legally required to reveal certain flaws (which vary by state) in a disclosure document. So if you find out a seller has tried to cover something up -- and that something is big -- it is typically well within your rights to take your earnest money and run.
5. The house isn't finished
Sounds weird, right? But it's something you should keep an eye out for if you're buying a new build.
"Builders are notorious for not delivering a finished product, and the buyer has every right not to close for what they are paying for," Jarvis says. "I had one where the builder wanted the buyer to close even with an unsafe deck." In that instance, the buyer would have been able to back out and get the earnest money back, but eventually the construction company fixed the problem (after firing the deck builder).
6. The seller backs out
This may be a no-brainer but just in case you're wondering: You're entitled to your earnest money "if the seller backs out for whatever reason," says Lynn Windle, a Realtor in Plano, TX. Perhaps the most common scenario for this is when you've got a sale contingency, but while you're waiting to sell your home the sellers decide to take another offer. But sellers can bail for all kinds of reasons, and whatever they are, rest assured, your earnest money is all yours.
Keep in mind, though, that it all depends on your contract: If it says your earnest money is nonrefundable, then you're probably not getting it back without a lawsuit. If it is refundable, you'll then need to get a release of contract and disbursement of earnest money form signed by all parties -- here's an example of one.
-- -- -- -- --
Related: Your Offer Was Accepted: What Next?