It typically takes weeks for buyers to make it to the closing table. They have to finalize their mortgage. The property has to undergo an appraisal and an inspection. The lender may even require a survey if there are inconsistencies regarding boundary lines or if much of the property’s value comes from the parcel rather than the improvements sitting on it.
A lot can change in the time between when the buyer first views the property and when they sign the closing documents. In some cases, buyers may no longer be able to complete the transaction, or their opinion of the property might change.
Will a buyer risk the loss of their earnest money if they cancel the closing?
Buyers can protect their earnest money
The good news for those hoping to buy real property is that they have many ways to limit their exposure. Earnest money is a standard component of residential real estate transactions. Buyers typically need to have about 3% of the total purchase price to present to the seller as a sign of their good faith.
That money typically stays in a special bank account until the closing occurs. If the buyer cancels the transaction, the seller can sometimes lay claim to the earnest money. However, buyers can reduce the risk of that outcome.
The simplest way to do so is through the use of contingencies when making an offer. Contingencies are essentially clauses that allow for the cancellation of the transaction without penalties. Inspection contingencies are common. If the inspector identifies issues not disclosed by the seller, the buyer may be able to cancel the closing without incurring a penalty.
Appraisal contingencies protect buyers in situations where an appraiser decides that the property is worth less than the amount they offered. Financing contingencies can also be important. If something changes with the buyer’s credit or they lose their job, they may not be able to secure a mortgage. A financing contingency helps protect the earnest money if the buyer cannot secure the financing necessary to complete the transaction.
Including the right terms in a real estate offer and negotiating the purchase agreement carefully can help protect buyers from financial hardship and overextension. Buyers often need help crafting appropriate documents that can help protect them throughout a real estate transaction.