How to Protect Your Escrow Deposit
After making an offer on a property that the seller accepts, it’s time to put money down to show you’re serious. The amount can be a few thousand dollars, up to 3 percent of the purchase price—or even 10 percent. In other words, a lot of money is at stake, and once deposited, the money can’t be moved or touched without written consent from both buyer and seller. At the close of escrow, the deposit is applied to the balance of the down payment. Here’s how to protect your escrow deposit.
1. Get an inspection
Every house should have an inspection before it’s sold. Your contract should include a “contingency” for such an inspection, to protect you from unwittingly buying a money pit. Typically, an inspector will look at the foundation, the roof, and everything in-between. You might also consider specialists, too, such as a heating ventilation and air conditioning (HVAC) specialist, a pool inspector, a termite inspector, or a structural engineer.
Should the inspector find problems, decide if you can live with them. Inspection contingencies are often so general that the buyer can get out of the contract and get their full deposit returned. Some call it the “cold feet” contingency, because sometimes buyers walk after the inspection, even if there weren’t major issues.
2. Get it in writing
Given tougher lending standards since the housing and credit crisis, the appraisal/loan contingency is more important than ever. A contingency clause allows the buyer to receive full written approval from the lender before the closing. So, if your loan is denied for some reason, you can exit the contract and get your deposit back.
If your loan broker isn’t willing or able to give you written notice that your loan has been fully approved, do not remove this contingency. If you do, you risk forfeiting your deposit. Some lenders will pull out or deny the loan at the last minute—like the day before they’re set to fund.
3. Thoroughly read disclosures
Sellers are required, in most real estate markets, to complete a series of disclosures regarding their knowledge of and experience with the property. By law, they’re required to disclose property defects, neighborhood nuisances, or anything that would negatively affect the property.
Additionally, you should have the opportunity to review any local or state reports, like a building permit history or a flood/earthquake map.
You should receive the seller’s disclosures and any required reports soon after your offer is accepted. In some markets, you might receive these disclosures before you make an offer. If you discover something negative about the property, this is your chance to say “no thanks” to the seller.
However, you’ll be required to sign off on these disclosures and reports at some point. Once you’ve done that, your deposit is at risk. So take your time. Review everything carefully. Don’t be afraid to ask questions about what you’ve learned.
Take your time
Depending upon a home’s price, a buyer’s earnest money deposit can be a significant sum. For example, a 3 percent deposit on a $450,000 property would be $13,500. That’s not the kind of money most people would want to lose. So take your time as you move from offer to contract to closing.