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Is Earnest Money Refundable? The Answer May Surprise You!


Understanding An Earnest Money Refund

Are Earnest Money Funds RefundableWhen you are purchasing real estate, there are quite a few things you need to know. One of those things is whether or not your money is refundable. Many buyers and sellers will ask their respective real estate agents whether the earnest money deposit is refundable.

Whether earnest money is refundable to a buyer depends on the circumstances. If a buyer has not followed the contract terms, a seller may be able to keep the deposit.

Let’s look at everything you need to know about who keeps the earnest money when the sale falls through.

What is Earnest Money?

When you buy a home, you’re likely to hear the term “earnest money. ” When you’re a first-time home buyer, the definition of earnest money may be unfamiliar. An earnest money deposit is the funds you put up in a real estate transaction that shows you are serious about purchasing a particular property.

It is often called a “good faith deposit” because it shows a seller you have a strong desire to purchase their home. In other words, you’re not wasting anyone’s time.

Without earnest money, a home buyer could walk away from the transaction without any consequences. Earnest money deposits hold a buyer’s feet to the fire to complete their obligations.

So, the purpose of earnest money is to give a buyer incentive to carry out their obligations with the purchase.

What is an Appropriate Earnest Money Deposit Amount?

The amount of earnest money that a buyer puts up depends on local traditions and can vary quite. Usually, it will be somewhere between one to five percent of the purchase price.

How much earnest money is collected can also vary depending on the current real estate market. If it is a competitive market, the amount could increase.

In a hot market with high demand, buyers will increase their deposits to make their offers more attractive. In many areas, the earnest money for a new home will increase to ten percent. The sales contract can be different with new construction due to builder policies.

When considering the purchase price of real estate, it can be a substantial amount of money to lose.

Who Holds The Earnest Money Deposit?

There are a few different parties that can hold earnest money. It is usually held by either the real estate company representing the seller, a designated escrow company, or a real estate attorney.

The monies held in an escrow account are duly accounted for at closing. These funds go towards the purchase price of a property.

An earnest money deposit check is given to your real estate agent at the time you make an offer on a house.

If your offer gets excepted and the property goes under contract, the money will be deposited shortly thereafter. When you’re offer does not get accepted, your deposit will be refunded back to you.

Earnest payments can be given in the form of a personal check or a wire transfer. Earnest funds should not be confused with a down payment – they are two different things.

Will I Get My Earnest Money Deposit Back?

One of the most asked questions in real estate transactions is will I get my earnest money back if the sale falls through. If a buyer legally follows the contract terms, then they will be able to get their deposit back.

However, if they do not follow the contract terms, they would be at risk of losing their earnest money. When contract terms are not met, a deposit becomes non-refundable.

A seller would be entitled to keep the earnest money.

Real Estate Contracts Typically Contain Contingencies

Real Estate Contingencies Help Protect Earnest MoneyMost real estate sales will have contingencies that allow a buyer to terminate a sale if certain conditions are not met. Some of the most common contingencies when buying a home are the following:

  • A home inspection contingency
  • An appraisal contingency
  • A mortgage contingency
  • A home sale contingency
  • Clean title contingency

Home Inspection Contingency

A home inspection contingency clause allows the buyer to have a certain amount of time to inspect the property for structural and mechanical defects.

The typical time frame allowed for a home inspection is seven to ten days from when an offer to purchase is signed. It is known as the due diligence period.

If there are problems discovered during this time period and the buyer notifies the seller in writing they no longer wish to proceed with the transaction, the buyer would be entitled to get their earnest money back.

In this case, it would be refundable as long as the buyer notifies the seller in the agreed-upon time frame.

On the other hand, if the buyer fails to notify the seller of their desire not to move forward and the home inspection contingency expires, the buyer’s earnest money deposit would be at risk. It no longer would be refundable.

Appraisal Contingency

Some real estate contracts say the property needs to appraise for at least the purchase price.

If the property does not appraise for the sales price, the buyer would be able to get their earnest monies returned. In this case, the funds would be refundable.

In hot real estate markets that favor home sellers, a buyer will often waive the appraisal to make their offer more attractive.

With bidding wars on houses, it is not uncommon for there to be an appraisal gap. An appraisal waiver will take this issue off the table.

Mortgage Contingency Clause

Unless a buyer is a cash buyer, there will be a mortgage contingency clause in a real estate contract. The clause will state that the buyer wishes to obtain a mortgage for X amount of dollars by a certain date.

If despite the buyer’s diligent efforts, they cannot procure financing, they will not be required to move forward with the transaction.

As long as the buyer notifies the seller in writing of their inability to procure financing by the specified date in the contingency clause, they would be entitled to get their earnest money back. The deposit monies would be refunded to the buyer.

The buyer could lose their earnest money if they did not notify the seller of their inability to get financing by the date written in the contract.

In that case, the seller would be entitled to keep their earnest money.

Clean Title Contingency

A title search will be conducted to ensure the property has a clean and marketable title whenever real estate is sold. The search will be conducted by a title company or real estate attorney specializing in title searches.

Having a clean title is built into nearly every real estate contract. If there was a problem with getting a clear title, the buyer would be entitled to a refund of the earnest money.

Home Sale Contingency

Although rare, some real estate contracts will have a home sale contingency that allows the buyer to sell their current home.

If the buyer cannot procure a buyer for their existing home, they would not be required to move forward with the purchase.

Home sale contingencies are very unattractive to a seller and are rarely accepted. A buyer’s earnest money would be refundable in this circumstance, which is why sellers avoid them.

A seller’s home could be off the market for an extended time and fail to proceed as planned.

You Can’t Just Change Your Mind and Get Earnest Money Back

Sometimes potential home buyers have a change of heart and decide not to move forward. Maybe some information was discovered, such as someone died in the house that disturbs the buyer. If you don’t have a contingency for the issue, you might be out of luck.

You can just change your mind and think there wouldn’t be any consequences. The purpose of earnest money is to prevent this from happening.

The Seller Might Not Be Able to Legally Perform

There could be circumstances where the buyer is entitled to get their earnest money back because the seller could not perform as agreed.

For example, if there were title issues with a property. Many real estate contracts have language that specifies if there are title issues, the seller has a specified amount of time to correct the title defect.

If the seller could not correct the problem in the allotted time, the buyer might choose to terminate the sale and get their deposit funds returned to them.

When A Deposit is Being Refunded, a Contractual Release Will Be Signed

When earnest money is being refunded to a buyer, there will be a release signed by both the buyer and seller. The release will state who is getting the earnest funds and both parties authorize the escrow holder to release said funds.

The release will further state that there are no further legal obligations by either party or any real estate agent involved in the transaction.  It becomes a hold harmless agreement.

Earnest Money Disputes Can Hold Up Release

There can be disputes between buyers and sellers on who should get to keep the earnest money in some circumstances.

When this happens, the money will not be refundable to either party until a court decides who gets to keep the funds.

The earnest money deposit will not be released from the escrow account until instructions are given to the escrow agent, who is legally entitled to the money. A court order will determine who legally deserves the earnest payment.

Final Thoughts on Earnest Money Refunds

As you have learned, whether earnest money is refundable depends on what the real estate contract says and whether you’ve followed it.

If you’re buying a home and following the terms, you’ll be able to keep your earnest money. If you didn’t, then the seller will be able to keep your funds.

It is essential to understand that most real estate contracts are legal and binding documents. If you don’t understand what you’re signing, consult a lawyer beforehand.

 


About the Author: The above Real Estate information on whether earnest money is refundable was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 35+ Years.

Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.

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Is Earnest Money Refundable? The Answer May Surprise You!

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Is Earnest Money Refundable? The Answer May Surprise You!

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Is earnest money refundable? See what you need to know about who keeps the earnest money when a home sale falls through.

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Bill Gassett

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Maximum Real Estate Exposure

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