When you make an offer on a home, you’ll usually include earnest money – a deposit that shows the seller you’re a serious buyer. This good-faith payment, typically 1% to 3% of the purchase price, is held in escrow and applied to your down payment or closing costs if the sale goes through. That means if the sale is completed, the money is not refunded – it’s credited toward what you owe. But what about if your deal falls through, is the earnest money refundable then?
Short answer: Yes, earnest money is often refundable, but only if specific conditions in your contract are met.
Whether you get it back depends on the terms of your purchase agreement, the contingencies included, and why the deal didn’t close. This Redfin article will walk you through when earnest money is refundable, when it’s not, and answer important questions you may have about earnest money.
When is earnest money refundable?
Earnest money is generally refundable if the buyer backs out of the deal for a reason protected by the purchase agreement. These protections usually come in the form of contingencies, which are clauses that allow you to walk away from the sale without penalty if certain conditions aren’t met.
Here’s when a buyer can usually expect to get their earnest money refunded:
Home inspection uncovers major issues
If the offer includes a home inspection contingency and the inspection reveals serious problems, like foundation damage, mold, or an outdated electrical system, the buyer can back out of the deal during the inspection period and get their earnest money refunded.
Buyer is unable to secure financing
A financing or mortgage contingency protects buyers if they’re unable to get approved for a home loan. Even with pre-approval, unexpected financial changes or lender decisions can prevent final approval. If this happens and they’ve included the right contingency, the buyer can usually walk away with their earnest money deposit.
The home appraises for less than the purchase price
An appraisal contingency allows the buyer to exit the contract if the home is appraised for less than what they offered and the seller won’t adjust the price. Without this contingency, the buyer could be on the hook for the difference, or risk losing their earnest money if they walk away.
Title issues are discovered
If the title search uncovers ownership disputes, liens, or unresolved legal claims on the property and the title can’t be cleared, the buyer can cancel the contract under a title contingency and get their earnest money refunded.
Seller backs out of the deal
If the seller backs out of the contract without a valid reason – say, they decide not to sell or fail to meet agreed-upon terms – the buyer is typically entitled to a full refund of their earnest money.
When is earnest money not refundable?
In most cases, earnest money becomes non-refundable when the buyer breaches the terms of the contract or backs out for reasons not covered by the agreement.
Here are the most common scenarios:
Buyer waived contingencies
In competitive markets, buyers may choose to waive protections like the inspection or financing contingency to strengthen their offer. However, doing so limits their ability to cancel the contract without penalty. If problems arise later, the buyer may be unable to recover the earnest money.
Buyer misses a deadline
Contingencies only apply within specified time frames. If a buyer fails to complete an inspection, secure financing, or take other required steps within the agreed period, they may forfeit their earnest money – even if the reason for backing out would otherwise be valid.
Buyer changes their mind
If a buyer gets cold feet, finds a different property, or simply decides not to go through with the purchase without a valid contractual reason, the seller is typically entitled to keep the earnest money deposit as compensation for time lost and potential offers missed.
How buyers can protect their earnest money
The good news is, buyers can take several steps to protect their earnest money and reduce the risk of losing it. By staying organized and following the terms of the purchase agreement, the deposit can remain secure throughout the transaction.
Key steps include:
- Include clear contingencies in the contract
- Meet all contract deadlines for inspections, financing, and other contingencies.
- Document everything in writing, including contract changes, deadline extensions, etc.
FAQs: Earnest money and refunds
Do I always have to put down earnest money when making an offer?
No, earnest money isn’t legally required, but in most markets, it’s standard practice. Without it, the offer may appear less serious, and the seller might choose a buyer who includes a deposit.
When is earnest money due?
Earnest money is typically due shortly after the seller accepts the offer, usually within 1 to 3 business days. The exact timing 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, such as a title company or escrow firm, until the sale is completed or terminated. If the sale closes, the deposit is applied to the buyer’s down payment or closing costs at closing.
What happens if I accidentally miss a deadline in the contract?
Missing a deadline (like for inspections or financing) may result in a breach of contract, which can put the earnest money at risk. The seller may have the right to keep the deposit if the buyer fails to meet agreed-upon terms.
When can the seller keep the earnest money?
The seller can keep the earnest money if the buyer cancels the contract for a reason not covered by contingencies, fails to meet deadlines, or defaults on the agreement.
How can I get my earnest money back?
To receive a refund, the buyer must cancel the contract according to the terms of a valid contingency and do so within the specified timeframe. The escrow holder will release the funds once both parties sign a release agreement or the cancellation terms are legally resolved.
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