Here’s a hot tip for home sellers regarding using the buyer’s earnest money to protect yourself in case the buyer’s financing is denied.

Earnest money is given by the buyer as consideration for entering into the purchase agreement. Your attorney or broker will be holding the buyer’s earnest during the course of the transaction.

The buyer will have an inspection of the property and will most likely submit a request for certain repairs to be done prior to closing. You, as the seller, will review the request and determine which repairs you will do or if you will give a credit to the buyer in lieu of doing the repairs. If you decide to complete the repairs prior to closing, you will have spent money out of your pocket to have the repairs done, if you don’t do them yourself.

Here’s where the mortgage contingency comes into play. The real estate contract requires the buyer to get a mortgage by a certain date. Typically the buyer will not meet that date and will request an extension to this date. If you have completed the repairs and have receipts as proof, then you can give an approval to the mortgage commitment date with the condition that the earnest be made non-refundable because you made the repairs as requested by the buyer. This protects you as the seller because if the buyer’s loan is denied, the buyer’s earnest should be released to you to compensate you for the money you spent on the repairs (and potentially additional holding costs incurred). As an alternative, you can agree to complete the repiars after the buyer’s loan approval and before closing.

An Agreement is an Agreement Until its Not

Now an agreement to make the buyer’s earnest non-refundable is great until its not. What do I mean by this? While the buyer may agree to this up front, there is a mutual cancellation form that gives the escrowee (the person holding the earnest) permission to release the earnest that must be signed by both parties. If the buyer doesn’t sign off on this, then the escrowee won’t release the earnest. To avoid this possibility, you want the buyer to sign a letter of direction to the escrowee at the time you approve the mortgage date extension request releasing earnest to you if buyer’s loan is denied without any further direction or approval from the buyer.

Speak With An Experienced Illinois Real Estate Attorney

There are many tips an experienced real estate attorney, such as Alexis Hart McDowell, will use to advocate for and protect their client’s interests. Use the Law Office of Alexis Hart McDowell as legal counsel for your next home sale or real estate investment opportunity - schedule a FREE consultation call today!

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