Knoxville Home Buying 101: What Is Earnest Money?

So, what is earnest money?

Earnest money plays a very crucial role in every real estate transaction. In this Knoxville home buying 101, we’ll cover what earnest money is, how it can increase your negotiating power, and what situations you risk losing your earnest money.

Earnest Money: A Definition

When you make an offer on your first Knoxville home, you’ll be required to put down earnest money. Earnest money is what you put down to show the seller that you’re serious about a home. It shows that you’re acting in good faith and that the earnest money is what you stand to lose should you decide to walk away from a transaction for no reason.

Earnest money is good for both buyers and sellers in a real estate transaction. A buyer can get their earnest money back for the reasons outlined in the contract, like a home inspection. A seller is also protected should the buyer decide not to hold up their side of the bargain.

How Earnest Money Can Increase Your Negotiating Power

Earnest money can be a very easy way to help increase your negotiating power when you make an offer. In Tennessee, there is no mandatory amount for earnest money. Generally, earnest money is anywhere from $500 to $5,000, depending on the price of the home.

By increasing your earnest money, you can show a seller that you are truly serious about buying a home. If you put $2,500 as earnest money instead of $500, you’re showing a seller that you’re that much more competent of a home buyer. When it comes to deciding between offers, this can help tilt the odds in your favor.

When You Will Keep You Earnest Money

In Tennessee, most real estate contracts, when written by a Knoxville realtor, come with certain contingencies that protect a buyer. When these contingencies aren’t met, a buyer is able to walk away with their earnest money. Here are the 4 most common contingencies that protect a buyer and allow them to get their earnest money back.

Inspection Contingency

Until a home inspection is completed, there is no telling what kind of issues a home can have including rampant mold issues, a leaky roof or a faulty foundation. And, there are certain times where a home has more issues than what you may want to take on.

Most contracts include an inspection contingency clause that protects you if there are inspection issues. If you’re unable to negotiate repairs with a seller or if the home inspection is altogether too scary, you’ll be able to walk away with the transaction and still keep your earnest money.

Appraisal Contingency

When a home doesn’t appraise, if you’re unable to come up with a solution with the seller, you are able to get your earnest money back. That is if you contract includes an appraisal contingency.

A lender will want to make sure an appraisal is performed on a property. They do this to ensure that they’re not lending out any more money than they have to. When a home doesn’t appraise, you’ll need to work out a solution with the seller. If you cannot, you can walk away with your earnest money.

Financing Contingency

Even when you get pre-approved with no problem, problems can arise along the way that could prevent from getting final loan approval. If something changes with your finances, it can be scary to think you may have to forfeit your earnest money. The good news, though, is you probably won’t.

Most contracts include a finance contingency clause. If you get laid off from your job or if something changes with your credit, a finance contingency clause protects you when you no longer can be approved for a loan.

Home Sale Contingency

Finally, you’ll also be able to get your earnest money back if the sale of your home falls through. Oftentimes, buyers need to sell a home before they’re able to buy, so there’s often a contingency that protects you if a sale of your home falls through.

Real estate transactions can be unpredictable. There is no telling what the appraisal or home inspection may find. Luckily, that’s why a home sale clause exists. You’ll get your earnest money back if the sale of your home falls through.

When Could You Lose Your Earnest Money

It is still possible for a buyer to lose their earnest money, if they try to back out of a contract for reasons other than what is outlined in a contract or if they fail to hold up their end of the deal in a transaction. Here are some of the common ways buyers lose their earnest money.

Waiving Contingencies

When you buy a home in a competitive market, it can be tempting to do anything in order to get your offer accepted. One common way buyers try to compete with an offer is by waiving contingencies. Unfortunately, waiving contingencies is an easy way to lose.

If you opt to waive these contingencies, you will not get your earnest money back. For example, if you waive your financing contingency, you would lose your earnest money should you not be able to secure a loan.

Waiving your contingencies can be a risky move. These contingencies are there to protect you. While you may want to make your offer more appealing, it can come at a cost.

Missing Deadlines

You also risk losing your earnest money if you drag your feet and miss deadlines during the process. Some buyers will change their mind throughout the process and decide to drag the process along, in hopes the seller will terminate the contract. Unfortunately, this has a way of backfiring.

As a buyer, you must make your loan application within 3 days of an offer being accepted and you only have a certain amount of time to preform you inspection and request any necessary repairs.

If you are constantly missing contract deadlines, you risk losing your earnest money. Sellers will typically extend a contract if they see a buyer is making a good-faith effort to adhere to the timeline outlined in the contract.

Getting Cold Feet

Finally, you risk losing your earnest money if you get cold feet for no reason. Sellers take their home off the market when they receive an offer, earnest money serves to protect them should a buyer decide to walk away for no reason.

The inspection contingency gives you the time to inspect the property and make sure everything is up to par. If it is not, you’re able to walk away with your earnest money. It is when you get cold feet for any reason other than what is covered in the contingencies in the contract. Before you make an offer on a home, it’s important that you’re sure about the home you’re making an offer on.

Buying your first Knoxville home is an exciting and overwhelming experience. If you’re like most first-time buyers, you may not be sure where to start. If there is anything we can do to help you in your home search, please do not hesitate to contact us. We’ve helped countless homeowners buy their first home and we’d love to do the same for you. Rick can be reached at 865-696-9002 or via email at [email protected]. Kati can be reached at 865-696-1888 or via email at [email protected].

Are you ready to start your home search? Visit our home search page to get started today. Or, be sure to keep up with our Knoxville First Time Home Buyer’s Blog to keep up with the latest information about buying your first home.