Who Gets to Keep The Earnest Money When a Home Sale Falls Through

Buying a house can be a truly exciting experience, especially for the first time. Sometimes things don't always go according to plan.

On occasion, a buyer may feel the need to terminate a sale. There could be numerous reasons someone may want to back out of a home purchase.

When the thought of termination happens, many buyers will ask their real estate agent whether the earnest money deposit will be refunded. The answer, of course, is it depends.

We will examine the circumstances when a buyer's deposit is refundable and when it isn't. Generally, buyers can get their money back when they follow the contingencies outlined in the real estate contract.

When they are not followed, the earnest money is at risk, and the seller can keep it.

What is Earnest Money?

Earnest money is a deposit made by a buyer as a show of good faith they are serious about buying a home. It is paid to the seller's real estate agent or attorney and is held in an escrow account until the purchase is completed.

The earnest money is credited toward the property's purchase price when finalized. However, it is essential to note that earnest money is not the same as a down payment.

In a typical real estate transaction, the earnest money deposit is 1-5 percent of the sale price. With new construction, it can be as high as ten percent. This deposit is typically paid when the buyer and seller enter a purchase agreement.

The earnest money is non-refundable if the buyer does not follow through with the purchase. The buyer must also meet certain conditions to get their earnest money back upon termination.

These common contingencies are outlined in the purchase agreement and can include the buyer obtaining a loan, passing a home inspection, and other potential contingencies.

If the buyer fails to meet these conditions, the earnest money is forfeited, and the seller keeps it. Sometimes, the buyer may get their earnest money back if they can prove that the seller breached the contract.

The earnest money serves as a guarantee that the buyer will follow through with the purchase, and it also serves as an incentive for the seller to accept the offer. Having earnest money is a common practice in real estate transactions and is a vital element of the home-buying process.

When Does a Buyer Get to Keep The Earnest Money?

If the buyer invokes a contingency before it expires, they can typically keep their earnest money. If the buyer does not meet the contingency's conditions or invoke it before the expiration, then the seller can keep the earnest money.

For example, a home inspection and a mortgage clause are the two most common contingencies in a real estate contract.

Home Inspection Contingency

The home inspection contingency clause will state the buyer has the right to hire an inspection professional to inspect the property within a certain amount of time. It is usually no more than 14 days, often between 7-10 days.

If the results are unsatisfactory to the buyer, they can back out of the sale with their earnest money deposit returned.

Mortgage Contingency Clause

In most home purchases, the buyer will need to procure financing. Buyers are usually given between 3-6 weeks to get a mortgage commitment for a specific amount.

When they cannot get funding from a lender, they can cancel the sale and get their money refunded.

Other potential buyer contingencies could include a satisfactory appraisal for at least the purchase price and a home sale.

However, home sale contingencies are often frowned upon, and many sellers won't consider them, especially in seller's markets.

When Can a Seller Keep The Buyer's Earnest Money?

The earnest money also serves as an incentive for the seller to accept the offer. If the buyer does not meet the conditions of the purchase agreement or does not fulfill their part of the contract, the seller can keep the earnest money as compensation for the time and effort they put into the sale.

So, the earnest money would be at risk if the buyer does not notify the seller or their agent in writing by the expiration of one of their contingencies.

Since there is no contingency in force, the seller can keep their money.

This is why contract dates become so vital to follow. When buyers don't, they can lose a significant amount of money.

When there is "buyer's remorse," and the termination of a sale happens for no reason, the seller can keep the deposit. Without earnest money, buyers could bail from a sale at any time without consequence.

The loss of these funds incentivizes a buyer to fulfill the contract.

Final Thoughts on Who Gets The Earnest Money.

It is vital that the buyer is aware of all the contingencies outlined in the contract and fulfills their part of the agreement to ensure they get their earnest money back.

It is also crucial to communicate with the seller's agent if they need to invoke a contingency or cannot meet the purchase agreement's conditions.

Without a buyer following through with the conditions of the contract, forfeiture of the earnest money is inevitable.