Earnest money is generally not an additional fee you’re paying on top of the purchase price.

If you successfully close, the money you’ve already deposited is typically credited into the transaction toward what you owe at closing.

The real question is:

What happens to that money if the transaction doesn’t close?

That’s where your contract — and your Realtor — become extremely important.

Your Earnest Money Is Not Automatically the Seller’s Money

In a typical Colorado residential contract, your earnest money can be held by an agreed-upon earnest-money holder, often a title company, in a trust account on behalf of the parties rather than simply being handed directly to the seller.

More importantly, your contract can give you several opportunities to terminate the transaction while remaining entitled to the return of your earnest money.

The Colorado contract specifically provides that if a buyer has a contractual Right to Terminate and timely exercises that right, the buyer is entitled to the return of earnest money as provided by the contract.

The important word there is:

Timely.

Your protections aren’t unlimited.

They’re tied to specific provisions and specific deadlines.

And that’s one of the biggest reasons having a Realtor who understands and actively manages your contract matters.

Protection #1: Inspection

This is probably the protection most buyers know about.

After going under contract, you generally have an opportunity to investigate the physical condition of the home.

Colorado’s inspection provision can allow buyers to evaluate things including:

• roof
• foundation and structural components
• electrical
• plumbing
• HVAC
• mechanical systems
• utilities
• certain outside conditions affecting the property

If something is unsatisfactory, the buyer may have the ability to terminate or submit an Inspection Objection by the applicable deadline.

Maybe we discover a sewer problem.

Maybe the roof has significant damage.

Maybe the furnace needs replacement.

Maybe there’s water intrusion.

Maybe the inspection uncovers something that changes how you feel about the purchase.

The point of the inspection period is to give you an opportunity to learn more about what you’re actually buying before moving forward.

And you don’t necessarily have to immediately terminate.

We may be able to negotiate repairs, credits, price changes, or another solution depending on the circumstances.

But those inspection rights have deadlines.

Protection #2: Your Financing Terms

Let’s say we go under contract, but once the lender puts the actual financing together, something about the loan doesn’t work for you.

Maybe it’s the payment.

Maybe it’s the interest rate.

Maybe it’s the cost.

Maybe it’s another condition of the financing.

Colorado’s residential contract can make the transaction conditional upon the buyer determining whether the proposed loan’s payments, interest rate, conditions and costs are satisfactory. The buyer can have a Right to Terminate by the New Loan Terms Deadline if those terms are not satisfactory.

Again:

Deadline.

The protection exists, but we have to use it while it’s available.

Protection #3: Loan Availability

This is slightly different from whether you like your loan terms.

Loan availability is more about whether the lender can actually provide the financing based on its review and underwriting of your loan application.

Colorado’s contract can give buyers a Right to Terminate by the New Loan Availability Deadline if the loan’s availability isn’t satisfactory.

And this is where things get serious.

The contract warns that if the seller isn’t in default and does not timely receive the buyer’s notice to terminate, the earnest money can become nonrefundable under that particular provision, subject to other remaining rights in the contract.

That’s why I don’t want my buyers finding out a deadline expired after we needed it.

Protection #4: Appraisal

Let’s say we agree to buy a house for $600,000.

The appraisal comes back at $570,000.

Now we have a problem to solve.

Under the Colorado contract’s conventional/other appraisal provisions, a buyer may have options including terminating or submitting an appraisal objection when the appraised value comes in below the purchase price, as long as the applicable deadlines are met.

From there, maybe:

• the seller lowers the price
• you bring additional money
• the parties meet somewhere in the middle
• another solution is negotiated
• or the transaction terminates

FHA and VA transactions can also carry specific appraisal protections relating to earnest money.

Again, the goal isn’t to scare you.

It’s to show you that putting down earnest money does not automatically mean you’re stuck buying the house regardless of what happens.

Protection #5: Property Insurance

Here’s one a lot of first-time buyers don’t think about.

What if you go under contract and discover that the property is extremely expensive to insure?

Or you can’t obtain coverage you’re comfortable with?

Colorado’s contract can provide a Property Insurance Termination Deadline allowing a buyer to terminate based on unsatisfactory availability, terms, conditions, or premiums for property insurance.

That’s why insurance is something I want investigated before the deadline expires, not the night before closing.

Protection #6: HOA Documents

If you’re buying a condo, townhome, or property in an HOA, you’re buying more than just the inside of your home.

You’re also becoming part of an association.

That means I want you understanding things like:

• monthly dues
• special assessments
• HOA rules and restrictions
• association financials
• reserves
• insurance
• meeting minutes
• what the association maintains
• what you will be responsible for

Colorado’s contract can give buyers the right to review association documents and terminate by the Association Documents Termination Deadline based on unsatisfactory provisions.

That’s potentially a huge protection.

I would much rather discover something concerning about an HOA before you own the property.

Protection #7: Title

Title is one of those subjects that sounds boring until there’s a problem.

Title review helps us understand what affects your ownership of the property.

There may be:

• liens
• easements
• restrictions
• recorded documents
• boundary-related issues
• third-party rights
• other conditions affecting ownership or use

Colorado’s contract contains provisions allowing buyers to review and, in certain circumstances, object to or terminate based on unsatisfactory title matters by applicable deadlines.

Again:

You have an opportunity to investigate.

That’s the pattern I want first-time buyers noticing.

Protection #8: Due Diligence and New Information

Depending on the property and how the offer is written, there may also be due-diligence documents that need to be reviewed.

Colorado’s contract can allow buyers to object or terminate when required due-diligence documents are not delivered or are unsatisfactory by the applicable deadline.

And what happens if the seller discovers something significant after you’re already under contract?

The contract also requires the disclosure of certain adverse material facts actually known to the seller, and a newly disclosed adverse material fact can create another Right to Terminate within the applicable timeframe.

So no — you’re not necessarily handing over thousands of dollars and hoping for the best.

You’re entering into a contract that contains rights, responsibilities and deadlines for both sides.

So How Do Buyers Actually Lose Earnest Money?

This is the part your Realtor should have already explained to you.

Earnest money isn’t protected forever.

You can put it at risk if, for example:

You miss an important termination deadline.

Maybe you had a right to terminate Monday.

Tuesday comes.

That particular contractual right may now be gone.

You intentionally waive a protection.

Sometimes buyers may alter or waive certain contingencies to make an offer more competitive.

That may strengthen an offer.

It can also increase risk.

You should understand exactly what you’re giving up before doing it.

You default on the contract.

If you’re contractually obligated to close and simply decide:

“Never mind, I don’t want it anymore,”

without having a remaining contractual basis to terminate, your earnest money may be exposed.

And that’s why I tell first-time buyers:

Earnest money doesn’t scare me. Missing deadlines scares me.

This Is Where Your Realtor Earns Their Value

A lot of people think a buyer’s agent’s job is:

Find a house.

Open the door.

Write an offer.

Celebrate when it gets accepted.

That’s only part of it.

Once we’re under contract, we can have deadlines involving:

• earnest money
• title
• HOA documents
• financing
• appraisal
• inspection
• insurance
• due diligence
• closing

One Colorado contract can contain dozens of individual dates controlling different rights and responsibilities throughout the transaction.

And as a first-time buyer, you probably don’t know which deadline is important yet.

That’s why you’ve hired me.

If inspection expires Friday, we need to be dealing with inspection before Friday.

If the loan deadline is approaching, I’m talking with your lender.

If HOA documents arrive, I want to know when your review period expires.

If there’s an appraisal issue, we’re addressing it while the appraisal protections are still available.

A Realtor who doesn’t properly track, communicate and manage contractual deadlines can put a buyer in a position they never needed to be in.

That’s not where I want my clients.

Your Earnest Money Is Part of Your Home-Buying Strategy

So when I tell you:

“Your earnest money is $5,000,”

I don’t want you thinking:

“I’m giving away $5,000.”

I want you thinking:

“I’m placing $5,000 into the transaction, and Troy is going to walk me through the contractual protections and deadlines that affect that money.”

There’s a difference.

Your earnest-money amount can also be part of our offer strategy.

A seller may view a larger deposit as a sign that a buyer is serious.

Sometimes we may offer more.

Sometimes less.

Sometimes around that common 1% range makes sense.

It depends on the deal.

The important thing is that you understand why we’re doing it.

Before You Submit an Offer, Ask These Questions

Before you put thousands of dollars into a transaction, you should know:

How much earnest money are we offering?

Why are we offering that amount?

Who is holding it?

When is it due?

What contractual protections do I have?

What are my major termination deadlines?

And most importantly:

When does my earnest money become more exposed?

If your Realtor can’t comfortably walk you through those questions, that’s a problem.

The Bottom Line

Earnest money is a good-faith deposit showing a seller that you’re serious about buying their home.

It’s often somewhere around 1% of the purchase price, although the actual amount varies.

If you close, that money is typically credited into the transaction.

If the transaction doesn’t close, whether you receive it back depends on why the contract terminated, how your offer was written, and whether the applicable contractual requirements and deadlines were followed.

Colorado’s residential contract can provide buyers with protections involving:

inspection, financing, appraisal, property insurance, HOA documents, title, due diligence, and other issues.

But those protections aren’t permanent.

They have deadlines.

And one of my jobs as your Realtor is making sure you understand those deadlines and that we’re making decisions before your options expire.

Because getting your offer accepted isn’t the finish line.

That’s when protecting the transaction begins.

Buying Your First Home in the Denver Metro?

If you’re preparing to buy your first home in Aurora, Lakewood, Parker, Centennial, Highlands Ranch, or elsewhere throughout the Denver metro, download my FREE Home Buying Roadmap.

My buying process takes you from consultation and financing through your home search, offer, inspection, due diligence and closing, so you understand what comes next instead of trying to learn everything after you’re already under contract.

[DOWNLOAD MY FREE HOME BUYING ROADMAP]

And if you’re ready to start the process, schedule a Residential Buyer Consultation with me.

You don’t need to understand every line of a Colorado real estate contract before you call me.

You should have somebody on your side who does.

This article is for general educational purposes and is not legal advice. Earnest-money rights depend on the specific contract, dates and deadlines, amendments, financing, property, and circumstances of each transaction. Buyers should review their contract with their real estate broker and consult a Colorado attorney when legal advice is needed.