If you are buying a home for the first time, you might not be aware that you need to put down a deposit when you make your offer as a sign of your seriousness. While this good-faith gesture portrays your intention to purchase the home, it also comes with the risk that you can lose this money if you decide not to follow through with your offer to buy. If you do decide to purchase the home, your escrow funds become part of your down payment.
Once your money is in escrow, you cannot get it back unless the seller agrees to let you do so. This means that in many cases, the money won’t be returned to you if you decide not to make the purchase, unless you’ve arranged one of the following three contingencies ahead of time.
1. Do Your Research before You Place the Offer
Typically, the seller must disclose existing problems with the property. Some of these disclosures might be directly connected to the house, while others might arise from the property’s location. For example, structural changes that do not meet state or local codes will require modification until they do. These changes might end up costing you thousands of additional dollars. Likewise, the presence of noisy or argumentative neighbors, particularly those individuals who dispute property lines, could be reason enough to look at a different home.
Read through the list of disclosures before you disclose your intention to buy the property if you live in a state that requires their submission prior to a formal offer. Get the answers to any questions you might have before you make the offer and include a contingency that you get the escrow deposit refunded if the sellers were not completely honest in their disclosures.
2. Link Your Escrow to Mortgage Approval
While it makes perfect sense that you should receive your escrow deposit back if you do not obtain the approval to borrow money, you should make sure that this contingency is listed along with your offer. If the unexpected happens and the bank, credit union, or mortgage lender denies your request for a loan, you should be entitled to get your escrow deposit back. Make sure this option is listed in any documentation that you sign.
3. Link Your Escrow to a Home Inspection
Ask your real estate agent to include a contingency that you receive your escrow deposit back if any expensive problems are discovered during the home inspection. Areas to focus on include the roof, heating and cooling systems, plumbing, electrical system, and foundation of the home. Minor problems shouldn’t be a concern, but anything major should deter you from the buying the home unless you can afford the added expense to remedy problems.
The size of your escrow deposit depends on your state’s regulations regarding this aspect of a home sale. However, even if the amount you must put down with your offer is only three percent of the purchase price, you will want the money back if you decide not to go forward with the purchase. Take a few moments to ensure this option is possible so that you don’t lose your hard-earned money.