When placing an offer on a property, it’s common to include earnest money – a deposit that demonstrates your commitment as a serious buyer. This initial payment, typically ranging from 1% to 3% of the purchase price, is held in escrow and can be used towards your down payment or closing costs if the sale is successful. In other words, if the sale goes through, the money is not refunded – it’s applied to what you owe. But what happens to the earnest money if the deal falls through?
Short answer: Yes, earnest money is often refundable, but only if specific conditions outlined in your contract are met.
The refundability of your earnest money depends on the terms of your purchase agreement, the included contingencies, and the reasons for the deal falling through. This article from Redfin will guide you through when earnest money can be refunded, when it cannot, and address important queries you may have regarding earnest money.
Under what circumstances is earnest money refundable?
Earnest money is typically refundable if the buyer withdraws from the deal due to reasons protected by the purchase agreement. These protections are usually in the form of contingencies, which allow you to exit the sale without repercussions if specific conditions are not met.
Here are situations where a buyer can expect a refund of their earnest money:
Discovery of significant issues during a home inspection
If the offer includes a home inspection contingency and the inspection reveals major issues such as foundation problems, mold, or outdated electrical systems, the buyer can walk away during the inspection period and receive a refund of their earnest money.
Inability to secure financing
A financing or mortgage contingency protects buyers if they are unable to secure a home loan. Despite pre-approval, unforeseen financial changes or lender decisions can hinder final approval. In such cases, with the appropriate contingency in place, the buyer can typically retrieve their earnest money deposit.
Appraisal below the purchase price
An appraisal contingency allows the buyer to exit the contract if the home appraises for less than the offered price and the seller refuses to adjust the price. Without this contingency, the buyer might have to cover the shortfall or risk losing their earnest money by walking away.
Uncovering title issues
If a title search reveals ownership disputes, liens, or unresolved legal claims on the property, rendering the title uncleared, the buyer can terminate the contract under a title contingency and receive a refund of their earnest money.
Seller backs out of the deal
If the seller withdraws from the contract without a valid reason – for instance, deciding not to sell or failing to meet agreed terms – the buyer is typically entitled to a full refund of their earnest money.
Under what circumstances is earnest money not refundable?
In most cases, earnest money becomes non-refundable when the buyer violates the contract terms or withdraws for reasons not covered by the agreement.
Here are common scenarios where earnest money may not be refunded:
Waiving of contingencies by the buyer
In competitive markets, buyers may opt to waive protections like inspection or financing contingencies to strengthen their offer. However, by doing so, they limit their ability to cancel the contract without consequences. If issues arise later, the buyer may struggle to recover the earnest money.
Missing a deadline by the buyer
Contingencies are only valid within specified timeframes. Failure by the buyer to complete an inspection, secure financing, or fulfill other obligations within the agreed timeframe may lead to forfeiture of the earnest money – even if the reason for withdrawal would otherwise be valid.
Buyer’s change of heart
If a buyer gets cold feet, finds another property, or simply decides against the purchase without a legitimate contractual reason, the seller typically retains the earnest money as compensation for time wasted and potential missed offers.
How buyers can safeguard their earnest money
The good news is that buyers can take measures to protect their earnest money and minimize the risk of losing it. By staying organized and adhering to the terms of the purchase agreement, the deposit can remain secure throughout the transaction.
Key steps to safeguard earnest money include:
- Clearly outline contingencies in the contract
- Meet all contract deadlines for inspections, financing, and other contingencies.
- Document all details in writing, such as contract modifications, deadline extensions, etc.
FAQs: Earnest money and refunds
Is earnest money mandatory for all offers?
Earnest money is not a legal requirement, but it is customary in most markets. Without it, your offer may appear less serious, potentially causing the seller to favor a buyer who includes a deposit.
When should earnest money be submitted?
Typically, earnest money is due shortly after the seller accepts the offer, usually within 1 to 3 business days. The exact deadline is specified in the purchase agreement.
Where does earnest money go?
Earnest money is held in an escrow account managed by a neutral third party, like a title company or escrow firm, until the sale is finalized or terminated. If the sale is successful, the deposit is applied to the buyer’s down payment or closing costs at the time of closing.
What happens if a deadline in the contract is missed inadvertently?
Missing a deadline (e.g., for inspections or financing) could result in a breach of contract, jeopardizing the earnest money. The seller may retain the deposit if the buyer fails to meet the agreed terms.
Under what circumstances can the seller retain the earnest money?
The seller can keep the earnest money if the buyer cancels the contract for reasons not covered by contingencies, misses deadlines, or breaches the agreement.
How can a buyer recover their earnest money?
To receive a refund, the buyer must terminate the contract in accordance with the terms of a valid contingency and do so within the stipulated timeframe. The escrow holder will release the funds once both parties sign a release agreement or the cancellation terms are legally resolved.