6 Common Contingencies in an Earnest Money Deposit Agreement

In almost every real estate transaction there comes a moment when the excitement a buyer is feeling fades just a little bit. It’s the moment right after they are told they are in contract, when they are actually handed the contract. This large mass of papers is full of confusing and difficult to understand statements and terms, and can be a source of frustration for the buyer if they don’t completely understand everything.

As a real estate professional, it is your job to put their mind at ease by explaining some of the aspects of the contract, especially the contingencies. The contingencies are to protect both the buyer and the seller should there be something preventing the real estate transaction from being completed. In many cases, it also ensures that the buyer gets their earnest money deposit back.

The earnest money deposit agreement is, of course, supposed to go towards the final closing cost balance, and is held in escrow until then. But a buyer may be concerned about what happens to his earnest money if there is a breach in contract something else that causes the real estate transaction to dissolve. Explain to the buyer that the following common contingencies that are usually standard in every contract relating to the earnest money deposit agreement will ensure they get their money back.

Mortgage Contingency

Although buyers are typically pre-approved for a mortgage, it doesn’t guarantee they will actually get one. You’ve probably experienced several circumstances in which buyers that appeared to be financially competent were revealed to have a whole host of financial problems once the lender started collecting and going through all the paperwork. The mortgage contingency protects the buyer when this happens — if, for whatever reason, the buyer cannot get a mortgage, they can walk away from the deal without legal problems, and with their earnest money deposit agreement returned.

Inspection Contingency

A house may look great on the surface, but when an inspection is performed, it can reveal a lot of problems and issues. Sometimes, these problems are more than the buyer wants to deal with. The inspection contingency states that if an inspection reveals lots of problems with a home that can’t be easily fixed without large expense or effort. For example, a home that needs a new roof, has serious plumbing or structural issues, or other serious problems could be deemed too troublesome for the buyer. In cases such as this, the buyer can cancel the real estate transaction and the earnest money deposit will be returned.

Appraisal Contingency

The appraisal contingency is similar to the inspection contingency, except in this case, the buyer can back out of the contract if the home appraiser values the home lower than the mortgage. A lender will not typically approve a mortgage for more than the appraised value of a home, so this can present certain difficulties for a buyer that has already offered more based on the sale price. However, the buyer and the seller can come to an agreement to negotiate on covering the difference if the buyer still wanted to purchase the home.

Insurance Contingency

This contingency ensures that a buyer will be able to purchase home insurance for a new purchase. Lenders usually require this anyway, but there may be some instances and areas where insurers will not want to insure certain properties.

Title Contingency

If the seller cannot prove that they hold the valid legal title of a home, the buyer can back out of the contract and their earnest money deposit will be returned. Most contracts require that a title search and report is performed, and it is especially important for the seller, because it could lead to potential legal problems and the loss of the home down the road if the title actually belongs to another individual.

Home Sale Contingency

Quite often, when a buyer is purchasing one home, they are also engaged in selling their own home. And if the timing isn’t right and the buyer’s home isn’t sold before they purchase their new home, the buyer could end up paying two mortgages. This contingency prevents that from happening by allowing the buyer to wait to go to closing until their current home is sold.

Of course, certain circumstances may require additional contingencies, but it is important to remember and to remind the buyer that they have the power to negotiate. It is also important to remind the buyer that many of the above contingencies also typically have deadlines. Certain actions, such as the home inspection or appraisal, must be performed within a certain time limit, or the contract could be negated, and, in some cases, the earnest money won’t be returned.

The majority of the contingencies are designed to protect the buyer, but the seller is not without power or the ability to back out of a contract either if certain contingencies aren’t met. Contracts should be read thoroughly so that all parties are fully aware of the contingencies detailed therein.

Additional Protection for the Earnest Money Deposit Agreement

While the buyer’s earnest money deposit agreement is certainly protected by many of the above contingencies, one thing it isn’t protected from is possible fraud. Real estate fraud is a growing problem as cyber criminals increase their efforts to target real estate professionals and home buyers. Individuals involved in a real estate transaction are often targeted because of the large sums of money involved, and the large amount of correspondence between the parties involving financial and banking information.

Earnest money deposits in particular are subject to fraud, especially when paid by check. However, one way to significantly reduce the risk of fraudulent activity is to use a secure money transfer platform for the receipt of earnest money deposit, as well as closing costs.

An ACH payment platform such as paymints.io is an ideal money transfer platform for real estate professionals to use. Aside from convenience and quick money transfers, it offers high-level security and encryption, money transfer tracking, and advanced ID verification so you can be assured that all the parties involved in a money transfer are exactly who they say they are.

To learn more about using the paymints.io platform, visit us today and schedule a free demo!

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