Second Liens and HELOCs in Short Sales: How to Get to Yes
Discover how to navigate second liens and HELOCs in short sales effectively. Learn strategies to secure approvals and achieve the best recovery for all parties involved.
Earnest Money in Short Sales: How It Works, When It’s At Risk, and How to Protect It
Understand earnest money in short sales: how it works, when it's at risk, and how to protect your deposit with strategic structuring and clear contracts.
TABLE OF CONTENTS
Earnest Money in Short Sales: How It Works, When It’s At Risk, and How to Protect It
Quick take: Short sales run on long, lender‑driven timelines. Keep earnest money fully refundable until written approval, restart contingency clocks at approval, and use a modest first deposit with a second deposit due after approval. Add a time‑out date if approval drags.
What is earnest money in a short sale?
- Earnest money (EM) is a good‑faith deposit held by a neutral escrow or attorney trust account.
- In a short sale, EM should remain refundable until the seller’s lender issues written approval and the parties accept those terms.
- Because approvals can take weeks to months, refundability and timing must be spelled out clearly in the contract.
How to structure deposits so they’re strong and safe
- Amount: Competitive but conservative. 0.5%–1% upfront is common in slower markets; consider more only if fully refundable.
- Two‑step deposit:
1) First deposit at acceptance, fully refundable until approval
2) Second deposit due within 3 business days of written approval
- Holding funds: Use a neutral escrow or attorney trust account. Never transfer EM directly to the seller.
Contract essentials (plain‑English)
- Refundability trigger: EM stays refundable until all are true: lender issues written short sale approval, buyer receives it, and buyer signs an approval addendum accepting the terms.
- Material changes = counter: If approval changes price, credits, fees, or timelines, treat it as a counter you can accept or decline. If declined, EM is refunded.
- Contingency clocks: Inspection, appraisal, loan, title, and disclosures start or restart on the first business day after the approval addendum is signed.
- Time‑out: If approval isn’t received by a stated date (for example, Day 75), the buyer may cancel and receive a full EM refund unless extended in writing.
- Closing window: Closing occurs within a set number of days after approval (commonly 21–30).
When earnest money is actually at risk
- You accept the approval terms and then miss contractual deadlines without extensions
- Contingency periods lapse after approval
- You waive protections prematurely without backups in the contract
- A material breach occurs (for example, non‑delivery of funds)
Risk reducer: Tie every deadline to the approval date and include automatic extensions for lender, HOA, title, or other third‑party delays outside your control.
Practical workflow that keeps everyone protected
- Do early inspections so deal‑breakers surface before a long wait
- Keep proof of funds or pre‑approval current while the lender reviews
- Respond to lender, escrow, or title requests within 48 hours to avoid preventable delays
- Verify wire instructions by phone using a known number to prevent fraud
- Keep a clean paper trail of deposits, notices, approvals, and addenda so escrow can release funds quickly if needed
Sample clause you can adapt (confirm locally)
Earnest Money shall be fully refundable to Buyer until: (a) written Short Sale Approval is issued by Seller’s lienholder(s), (b) Buyer receives such approval, and (c) Buyer executes an Approval Addendum accepting the approval terms. All contingency periods (inspection, appraisal, loan, title, disclosures) shall commence or, if previously commenced, restart on the first business day after Buyer’s execution of the Approval Addendum. A second earnest money deposit of $_ shall be due within 3 business days after Buyer’s execution of the Approval Addendum. If written Short Sale Approval is not received by _ (date), unless extended in writing by the parties, Buyer may cancel and receive a full refund of Earnest Money.
(Work with your agent, broker, or attorney to align this with your state forms.)
Timeline at a glance
- Offer accepted and short sale addendum signed
- Initial refundable EM deposited to neutral escrow
- Lender review: often 30–120 days
- Lender issues written approval with terms and a closing deadline
- Approval addendum signed; contingency clocks start or restart
- Second EM deposit made
- Inspections, appraisal, loan, HOA and title clearances
- Contingency removals and close
FAQs
- Is EM ever non‑refundable in a short sale? Only after approval is accepted and contingencies lapse or there’s a breach. Before that, it should remain refundable.
- Can a lender require a bigger deposit? They may request it, but deposit terms are set in your contract. If EM increases, keep it refundable until approval.
- What if the approval changes price or dates? Treat it as a counter. You can accept, negotiate, or decline and obtain an EM refund.
Bottom line
Use a modest first deposit, a second deposit at written approval, and contract language that keeps EM refundable, resets clocks at approval, and includes a time‑out. That signals commitment without turning your deposit into a trap.
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