Buying a house is a multistep process. First you make sure you can get the financing, then you put time and effort into looking for the perfect property. If it’s a particularly competitive real estate market, you’ll probably feel pressured to put in some type of home purchase agreement immediately. But this legally binding contract can get you in trouble if you need to back out of the deal.

The biggest issue with any purchase and sale agreement is the deposit you put down when you sign the document. This deposit, known as earnest money, is generally 1 to 2 percent of the purchase price of the home, but it can be as much as 10 percent. Your broker passes the earnest money on to either the seller’s agent or the title, where it is held until closing and usually put toward closing costs. But if you sign a home purchase agreement and don’t follow through, that deposit will be at risk.

Reverting to Seller

In most cases, if you had a purchase and sale agreement and you don’t have a good reason, contractually, for backing out, the seller keeps the earnest money. This good faith deposit had the seller possibly turning down other offers while waiting for the sale to go through, so it helps offset that inconvenience.

Contractual Breaches

What if your financing falls through or the home doesn’t pass inspection? The good news is, you may have an “out” in those cases. Check your house purchase agreement for any contingencies. Generally, a home purchase agreement is written so that if the house doesn’t appraise or pass inspection, it’s invalidated. You may also get a refund if your contract is contingent on getting financing.

Grace Period

Although violating the purchase and sale agreement does technically mean the deposit goes to the seller, there can be a grace period in which the money goes back to you. This may be called a rescission or “cooling off” period. It isn’t typical in these types of contracts, though, and when it is included, it’s usually only a few days, not weeks or months.

Declining a Deposit

Of course, you do have the option of putting in an offer without paying earnest money, but it’s rare that this type of offer is accepted. Particularly if you’re in a competitive housing market, you won’t be able to make an official house purchase agreement without a deposit to hold it. Someone will make an offer with earnest money attached, and you’ll then lose the opportunity to buy it.

Since earnest money is often binding, it’s important to avoid signing a house purchase agreement unless you’re absolutely sure this is the home you want. To save time, it can also help to get preapproval for financing. Otherwise, you’ll find that you’re consistently losing houses to buyers who have both the earnest money and the financing lined up to buy.

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