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

In most situations, after the real estate purchase contract is signed, the seller can cash the earnest money check.

Question

My offer to buy a new home was just accepted by the seller a week ago. The contract stated that I was to put up $3,000 in earnest money. After the seller accepted the offer, my real estate agent delivered a check for $3,000 to the seller as my earnest money and to show my good faith. I was shocked to get a notice from my bank this morning that the check was cashed even though we are a month from closing!

I now am overdrawn on my account. I have the money in another account, but I thought the seller was just going to hold onto the check until closing. I never imagined that he would go ahead and cash it. Didn't he have to notify me that he was going to cash it?

Answer

The last thing you need while you're under the stress of a home purchase is a financial concern like an overdrawn bank account. However, the seller didn't have to provide you with any further notice that he was going to cash your check, unless the purchase contract stated that he 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 his rights to deposit it. The earnest money is held in escrow by a third party until the deal either closes or falls through. The seller receives the money 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 default. Depositing the check also prevents an unscrupulous buyer from later canceling the check if he decides to break the contract without a valid reason.

Because your account was overdrawn, you need to get this cleared up with your bank and the seller immediately. As of right now, the seller does not have good funds in his possession for your earnest money, and you are likely in violation of the purchase contract.

If that's the case, 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.

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