Before you start packing boxes for your new home, you’ll need to wade through a lot of paperwork—and put down some cash. If it’s your first time buying a home, you’ll encounter the term “earnest money.”
However, sometimes even with the best intentions, a deal can fall through. Maybe you found unforeseen issues during the home inspection, or you could not get approved for a loan. In these cases, you may be wondering: Is earnest money refundable?
What Is Earnest Money?
So what exactly is earnest money? In short, it’s a deposit made to show the seller that you’re serious about buying the home. The amount is typically 1-2% of the purchase price and is held in escrow until closing.
If everything goes smoothly and you end up closing on the home, the earnest money is applied to your down payment. But what happens if the deal falls through? That’s where things can get a bit tricky.
If the deal falls through, you may be able to get your earnest money back. However, there are also several scenarios where you could lose it.
Reasons you could lose your earnest money
1. The home is sold to another buyer.
Unfortunately, if you back out of the deal or are otherwise unable to close, the seller is free to sell the home to someone else. In this case, you would not be entitled to a refund of your earnest money.
2. You violate the purchase agreement.
The purchase agreement is a binding contract between you and the seller. It outlines the agreed-upon terms of the sale, such as the purchase price, closing date, and any contingencies that must be met.
You could forfeit your earnest money if you violate the agreement—for example, by failing to get financing or not completing a home inspection. Check your purchase agreement carefully before signing to ensure you understand all the terms and conditions.
2. The seller is unable to deliver the property in the condition that was agreed upon.
When you buy a home, you typically have the right to inspect it before closing. If you find any issues not disclosed by the seller, you can ask them to be fixed or walk away from the deal.
However, if the seller is unable to deliver the property in the condition that was agreed upon, you may lose your earnest money.
To avoid this, be sure to do your due diligence and thoroughly inspect the property before signing a purchase agreement. Check out Things no one told you about buying your first home to learn more.
3. The deal is canceled due to a contingency.
A contingency is a condition that must be met for the deal to go through. For example, you may have a loan contingency, which means that your offer is contingent on you being approved for a mortgage.
If you cannot get financing, the deal will be canceled, and you’ll get your earnest money back. However, you may forfeit your earnest money if you cannot meet any other contingency, such as getting insurance or selling your current home.
4. You’re unable to get approved for a loan.
Naturally, if you cannot get approved for a loan, the deal will fall through. In this case, you should be able to get your earnest money back.
However, suppose you cannot get approved for a loan because you failed to disclose important information on your loan application, such as previous bankruptcy. In that case, you could forfeit your earnest money.
Be honest and upfront about your financial situation to avoid any surprises down the road.
5. You change your mind about the deal.
If you simply change your mind about the deal, you may not be entitled to a refund of your earnest money. Once you sign a purchase agreement, you’re legally bound to follow through with the sale.
Of course, there are always extenuating circumstances, such as if the home is no longer safe to live in due to unforeseen damage. In these cases, you may be able to back out of the deal and get your earnest money refunded.
When is earnest money refundable (when a deal falls through)?
When a deal falls through, it’s still possible to get your earnest money back. In general, the earnest money is refundable if:
1. You back out of the deal for a reason allowed by the purchase agreement.
To get your earnest money back, you’ll need a clause in your purchase agreement that allows you to back out of the deal for a specific reason.
For example, many purchase agreements allow buyers to back out if they cannot get approved for a loan. Not all purchase agreements are the same, so read yours carefully before signing.
2. There is a problem with the home that the seller did not disclose.
If you find any problems with the home during your inspection, you can ask the seller to fix them or walk away from the deal. When you walk away from the deal, you should be able to get your earnest money back.
3. You’re unable to get approved for a loan.
Of course, if you’re not able to get approved for a loan, the deal is going to fall through. In this case, you should be able to get your earnest money back with no issues.
However, as mentioned before, if you’re not able to get approved for a loan because you failed to disclose important information on your loan application, such as previous bankruptcy, you could forfeit your earnest money.
4. You change your mind about the deal for a valid reason.
Valid reasons for changing your mind could include:
- The property is no longer safe to live in due to unforeseen damage.
- You discover that the seller has lied about the condition of the property.
- You can no longer afford the property.
These are some valid reasons, but they’re not the only ones. If you have any doubts about whether or not your reason is valid, be sure to speak with a lawyer before making any decisions.
How can I get my earnest money back?
If you decide to back out of the deal and get your earnest money back, you’ll need to follow the procedures laid out in your purchase agreement.
For example, if you’re backing out because you’re not able to get approved for a loan, you might need to provide the lender with a copy of the loan denial letter.
If you’re backing out for any other reason, you’ll likely need to provide written notice to the seller and any other parties involved in the deal.
Once you’ve provided the required notice, the seller will have time to respond. If they don’t respond within that time frame, you should be able to get your earnest money back without any problem.
FAQs:
Q: Do I need to put down earnest money when buying a house?
A: While it’s not required, most sellers expect you to put down earnest money as a sign of good faith.
Q: How much is earnest money typically?
A: The amount of earnest money varies, but it’s usually 1-3% of the home’s purchase price. So if you’re buying a home for $200,000, your earnest money could be anywhere from $2,000 to $6,000.
Q: Do I need a lawyer to help me with the earnest money process?
A: You’re not required to have a lawyer, but it’s always a good idea to consult with one before signing any legal documents. A lawyer can help you understand the purchase agreement and ensure you’re protected in case anything goes wrong.
Q: How is earnest money different from a down payment?
A: Earnest money is a deposit you put down to show the seller that you’re serious about buying the home. The down payment is the money you’ll need to buy the home.
Q: I’m unsure if I want to go through with the deal. Can I get my earnest money back?
A: It depends on the situation. If you cannot get approved for a loan, you should be able to get your earnest money back. However, if you change your mind about the deal for any other reason, it’s up to the seller to decide whether or not they want to give you your money back.
Conclusion
Earnest money is a sign of good faith when you’re buying a home. It shows the seller that you’re serious about the deal, and it helps to protect them if you decide to back out.
While earnest money is typically refundable, there are some situations where you might not be able to get your money back. You should understand the risks before putting down earnest money and ensure you’re comfortable with them.
