3 Ways to Protect Your Escrow Deposit

So you have finally decided to pull the trigger and make an offer on a home, the seller chose to go with your offer over everyone else’s, and signing the contract is days away. Now you have to show you are serious about it by putting a stack of money down.

The amount of money you put down is ultimately up to you, but some states have requirements, varying anywhere from 3 to 10 percent. This is a good-faith act signaling to the seller you are committed to following through on the deal. Once the money leaves your hands (or bank account) it can’t be touched without written consent from both the seller and buyer. The close of escrow, the earnest money deposit is applied to the balance of the down payment.

Your deposit is obviously negotiable, but if you try and go short, it may turn off the seller quickly. A lot can happen from the time you put down your deposit and close escrow, so here are a few ways to protect your deposit.

Know the property

Every home gets an inspection before it’s sold, and it’s your duty to make sure you protect yourself from buying a black hole home. Ask your agent to insert a contingency to make sure you are protected from these types of homes.

Older homes get special attention to roofs, foundations, and everything considered “major”. Specialized inspectors are an option if you so choose to go that route. They come in the form of HVAC inspectors, termite inspectors, pool inspectors, structural engineers, etc.

Small condos even warrant having expert inspectors from time to time.

If problems arise, you need to decide if it is worth it to you or not. How bad do you want this house? Inspection contingencies sometimes are as broad as the ocean and allow for buyers to sail away with their deposit. Most of these are known as “cold feet” contingencies.

Get it in writing

One of the most important parts of the process is to ensure the home doesn’t appraise for less than you buy it for, and getting a written statement approving your loan.

Ever since the crash, lending and credit have gotten a bit stricter, so the appraisal/loan contingency is more vital than ever. The contingency clauses allow buyers to have written approval from the lender before closing the deal. Basically if your loan doesn’t go through for whatever reason, you can leave the contract with your deposit.

If the broker won’t give you a written notice of approval for whatever reason, leave the contingency in the contract! If you take it out, you may risk losing your deposit. It’s not unheard of that some lenders reject the loan, or withdraw from the deal at the last minute.

To really safeguard your deposit, grill the loan broker and don’t let the seller pressure you into moving ahead. It is within your right to ask the seller for an extension if you need one. At this point of the process, everyone should be working together to make the deal go through, but if you sign off that you are approved when you were actually denied, you will lose your deposit.

It would be wise to add an appraisal contingency to the loan contingency. The home should not appraise less than the buying price. Big buyers have larger down payments so they could get a loan approval while the property appraisal comes in low. As the buyer, you should renegotiate the purchase price if the appraised price is less than the contract price.

Review the property disclosures

Most states require sellers to disclose their knowledge of and experience with the property. Law states they must admit to property defects, neighborhood nuances, or anything that would affect the property in a bad way.

The state should have files on the home as well. If the home was damaged by a fire, earthquake, tornado, etc. the state would have taken note.

Once your offer is accepted you should receive the seller’s disclosures and any reports that go along with it. Sometimes they come before the offer is made, just depending on what market you are in. If something doesn’t sit well with you about the property, it’s up to you to walk away. If you so choose to walk, you must sign off on the disclosures, leaving your deposit at risk.

Take your time; ask as many questions as many times as you want.  Remember your deposit is on the table, so do what you have to do in order to do it right the first time.

All in all, this deposit can total up to thousands of dollars. Unless you are filthy rich, 3% of a $200,000 dollar home is something nobody wants to let blow away in the wind. 

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