How do earnest money deposits work in a short sale?

Earnest money is required in a short sale transaction, although the funds do not necessarily have to be deposited into an escrow account immediately. It is best to wait until after receiving bank approval before placing funds into escrow. This can be easier said than done depending on how the agent and lender draft and present their contracts.

The Role of Earnest Money in a Short Sale

The selling party in a short sale appreciates good faith gestures as much as with any normal property transaction. In fact, short sales might require even more trust up front because of how daunting the process can be for both parties.

Many buyers and sellers are confused about the functionality of earnest money. Sellers might operate under the assumption that earnest money is forfeited as soon as a housing deal falls through. This is not the case. Buyers might believe they automatically receive their deposit back if the deal does not close, but this is not true either.

The buying party agrees to forfeit earnest deposit money under specific conditions, normally for failure to close in time. Since the lender establishes the closing deadline, the buyer and seller should both work to ensure the lender approval is done correctly and expeditiously.

If closing is not done properly, the buyer loses his earnest deposit and the seller is likely to face foreclosure. This gives each party an incentive to enter and negotiate in good faith.

Size of Earnest Money Deposit for Short Sale

Most real estate transactions include an earnest money check, but the amount of the check depends on many factors. If there is a lot of demand for the property, which is not usually the case with short sales, the earnest money deposit might need to be larger. Amounts do not normally exceed 1 to 3% of the purchase price.