When you’re in the process of purchasing a home, you’ll encounter the term earnest money – a deposit that serves as a demonstration of your commitment to buying the property. But what happens to this money once the deal is finalized? Does it go towards your down payment? Will you receive a refund? Or does the seller retain it?
Having a clear understanding of how earnest money functions can enhance your confidence as you navigate the homebuying journey. This article from Redfin will delve into the specifics of what occurs with your earnest money at closing and what to anticipate in various scenarios.
What exactly is earnest money?
Earnest money is a deposit made after your offer on a home is accepted, indicating to the seller your serious intent to purchase the property. It acts as a gesture of good faith, signifying your dedication to the transaction.
This deposit typically ranges from 1% to 3% of the home’s purchase price, although the amount can vary based on the local market conditions and the agreement with the seller.
The earnest money is usually held in an escrow account – an impartial third party, such as a title company or real estate brokerage, safeguards the funds until the sale is finalized. This setup ensures that neither the buyer nor the seller can access the money prematurely, providing protection for both parties during the transaction.
What happens to earnest money when closing?
At the closing stage, your earnest money doesn’t vanish – it is utilized to cover the costs associated with buying the home. Typically, this means:
- It can be applied towards your down payment. If you’re making a down payment on the home, the earnest money will be deducted from the amount you owe.
- It can assist in covering some of your closing costs. If your down payment is already covered, the earnest money can contribute towards paying lender fees, title fees, and other closing expenses.
- You may be eligible for a refund. If your earnest money surpasses the total costs due at closing, you will receive a refund for the excess amount. This situation is more common with VA loans or USDA loans, which do not require a down payment.
For example: If you put down $5,000 in earnest money for your dream home in Boston, MA, and your total amount due at closing (down payment + closing costs) is $20,000, then you would owe $15,000 more at closing.
Can you receive earnest money back at closing?
In most cases, yes – but it typically doesn’t come in the form of a direct refund. As mentioned earlier, instead of receiving the earnest money back as cash at closing, it is typically used towards your down payment or closing costs. Therefore, even though you won’t get a check for the amount you put down, the money is still contributing to the home purchase.
However, there are a few scenarios where you may receive a refund:
- You paid more than the required amount. If your earnest money deposit exceeds your necessary cash-to-close figure, you will receive the surplus back.
- You’re utilizing a zero-down-payment loan. With VA or USDA loans that do not necessitate a down payment, if your earnest money surpasses your closing costs, the extra amount will be refunded.
- You received concessions from the seller or credits from the lender. If the seller agrees to cover some of your closing costs or your lender provides credits, the amount you owe at closing may be less than the earnest money you already paid – resulting in a refund.
For instance: You put down $4,000 in earnest money for a house in Portland, OR, but due to seller concessions and lender credits, your closing amount is only $3,000. This means you will receive $1,000 of earnest money back.
Other potential scenarios: What else could transpire with earnest money?
There are a few situations where earnest money could be refunded or forfeited:
1. You retract due to a contingency → you receive your earnest money back
Most purchase agreements incorporate contingencies that permit you to cancel the deal without repercussions. If you withdraw for one of these protected reasons, you will get your earnest money back.
- Inspection contingency: If a home inspection uncovers significant issues and you opt to walk away (within the agreed timeframe), you can retrieve your money.
- Financing contingency: If your loan falls through despite your best efforts, you can typically back out and recover your earnest money.
- Appraisal contingency: If the home’s appraisal is lower than the purchase price and you cannot negotiate a lower price, you might be able to walk away with your deposit.
2. You withdraw without a valid reason → seller retains earnest money
If you decide not to proceed with the purchase without a contractually protected reason, the seller is likely to keep your earnest money as compensation for their time and effort.
3. The seller backs out → you get your earnest money back
If the seller terminates the deal (without a permissible reason in the contract), you should receive your earnest money back in full. In certain cases, you may even have grounds to pursue legal action for damages.
4. Closing is delayed → money remains in escrow
If closing is postponed due to title complications, financing delays, or other factors, your earnest money will stay in escrow until the sale is concluded.
5. Deal collapses due to an appraisal shortfall → outcome depends on your contract
If the home’s appraisal falls short of the purchase price and you lack an appraisal contingency, you may have to bridge the gap or forfeit your earnest money.