Is Earnest Money Required in A Short Sale?

Is Earnest Money Required In A Short Sale Situation?


Q: My agent informed me that earnest money for a short sale transaction was required to make a contract binding. Is that true? More importantly, is earnest money refundable if a buyer pulls out of a contract prior to bank approval even though our contract provides for bank approval within 60 days?
–Anonymous, Bartlett, IL

A: The promise of the earnest money deposit is needed, but the money does not have to be placed into escrow until the bank approves the sale. This is a common error.

The contract is not binding because it is still subject to the banks approval. But even if you do place the money into escrow, you still have the right to its return before bank approval. Even after bank approval, you may still have a right to its return, but this is dependent on the terms of the contract.

If the contract cancels and your deposit is in escrow, then you will need both you and the seller to sign documents allowing its release. Without the signatures, you start down the path of legal recourse.

I always recommend that in a short sale, the earnest money deposit be placed into escrow after the banks approval. Since banks do not give you much time to close after their approval, I tell my clients to do their investigation, inspections and prepare their financing documents with the lender’s underwriter before the bank approves the short sale. This way when the approval arrives, the buyer is ready to close quickly.