Does a Home Seller Have to Notify Me Before Cashing My Earnest Money Check?

After you've had an offer to buy a new home accepted by the property seller, you will likely (according to the terms of your purchase contract) have to put down earnest money. The amount varies, but is usually a percentage of the purchase price. Let's imagine, for instance, that your real estate agent delivered a check for $3,000 to the seller. You might then be surprised to look at your bank statement and realize that the check has already been cashed, though you are weeks away from the deal closing! Worse yet, the withdrawal might have overdrawn your account. We'll discuss here:

• why such a thing can legally happen, and
• what steps to take next.

When the House Seller Can Deposit the Earnest Money Check

It's not uncommon for homebuyers to assume that the property seller would hold onto the earnest money check until closing. However, a property seller doesn't have to provide with any further notice of plans to cash the check, unless the purchase contract stated that the seller would refrain from depositing it until a certain date.

Once the parties have signed the purchase contract and the seller receives the earnest money check, the seller is well within their legal rights to deposit it. The earnest money is held in escrow by a third party until the deal either closes or falls through. That means the seller doesn't literally receive the money yet. That happens later, either at closing or in the event the buyer backs out for a reason not allowed in the contract.

The main reason that the check is actually deposited into escrow (as compared to the seller just holding on to it) is to verify that there are good funds available in the event of the buyer defaulting. Depositing the check also prevents an unscrupulous buyer from later canceling the check upon deciding to break the contract without a valid reason.

Dealing With the Bank and Property Seller Regarding an Overdrawn Account

The last thing you need while you're under the stress of a home purchase is a financial concern like an overdrawn bank account. You need to get this cleared up with your bank and the seller immediately. Until then, the seller does not have good funds in his possession for your earnest money, likely putting you in violation of the purchase contract.

If so, the seller could technically find another buyer, while still holding you accountable for the earnest money. And, it's likely your bank is going to hit you with fees for the overdraft.

Hopefully, once you or your agent explain to the seller the misunderstanding about the earnest money, the seller will understand and give you a bit more time to gather the funds and submit a new check. But it is important that you not delay, as time is of the essence in a real estate purchase contract.