You thought the hard work was done already- you hired the best buyer’s agent, found a gorgeous two story with an outdoor fireplace, and decided to offer up a big chunk of cash for the earnest money deposit to show the seller how much you wanted it. Now, the inspector your agent insisted you hire, is telling you the second story is about to crumble into the first and the fireplace is a fire hazard. It has you wondering- is earnest money refundable?
What is earnest money?
Earnest money is a good faith deposit put down by the buyer when a contract on a new home is signed. It essentially lets the seller know you’re serious about buying their property, and you’re not just putting in offers all across town to find the one you like best. This is typically anywhere between 1-5% of the list price and is held by an unbiased third-party, like a title company.
Where does it go?
In the best case scenario, you arrive at the closing and you are pleasantly surprised to find the full amount of your earnest money deposit has been applied towards the closing costs or down payment on your brand new dream home. It was exactly like it sounded, a deposit on something you were meant to own all along.
If you don’t make it to the closing table, it could end up in a couple of places- back in your hands or in the hands of the seller. The party that ends up with the earnest money if the property doesn’t close is dictated by the contract itself.
When is my earnest money refundable?
Lucky for you, there is a given period of time where there are a handful of valid reasons for the buyer to terminate the purchase contract and get their earnest money refunded. All of these reasons are governed by the contract contingencies and their due dates.
Some of the typical ones include:
Property inspections reveals issues. Under the inspection contingency, the buyer has a period of time to complete a number of inspections. If there is mold growing in the bathroom and the septic backing up in the basement, you may feel like it’s just not the dream home for you anymore, and it doesn’t have to be. You can walk away, earnest money in hand. Many buyers also negotiate things like a lower sales price or closing costs for items found in an inspection instead of turning away entirely. A good buyer’s agent can help you weigh the options and decide when it’s best to move or move on.
You’re unable to get financing. If you’re unable to find a lender to lend you the money you need to purchase the home, you can get your earnest money refunded under the financing contingency. Most contracts are going to require you notify the seller of this within a couple weeks of the accepted offer.
Home appraises for much less than anticipated. Usually your lender will want to appraise your future home to make sure they are making a good investment, and if they find it’s less than the amount you’re asking them for, they may only lend up to the appraised amount. That would leave you covering the difference. With the appraisal contingency, you’re able to take your earnest money and run if you find the appraised value is way under what you anticipated.
Your current home doesn’t sell. If you’re hoping to sell your current home to afford the new one, you’ve likely included a contingency for it. This contingency will protect you and your earnest money if your current home doesn’t close by the time your purchase is set to take place. The due date on this contingency can vary based on how quickly your Realtor thinks your current home will sell.
The seller backs out. You reminded the seller how awesome their house actually was, and now they want to stay. It seems obvious, but the earnest money would be refunded to the buyer in any situation where the seller backs out of the deal.
In hot markets, it’s not uncommon for a buyer to waive some of the most common contingencies to make their offer appear more lucrative to a seller. However, this puts that big chunk of change you put down in earnest money at risk. Let’s say you waive the contingency for inspections, but find later, when you’re snooping around at the final walk-through, that the toilet is leaking into the laundry room. Can you back out of the sale? Yes, but you may lose your earnest money. Make sure you and your buyer’s agent are on the same page about what you can afford and the consequences of waiving each contingency.
Earnest Money Disputes
In the case where the contract is terminated, both parties must sign to release the earnest money. If the buyer and seller both believe they are entitled to the earnest money and refuse to come to an agreement, the money will stay in escrow until an agreement is made or litigation is complete.
In most cases, the buyer happily skips home with their earnest money refund in hand. However, there are cases where waived contingencies, missed deadlines, and cold feet leave a large sum of money with the seller. It’s safe to say that reading your contract in detail and hiring a top buyer’s agent can go along way in protecting your earnest money. You don’t want to find out last minute if your earnest money is refundable.