When buying a home, earnest money is one of the first steps in the process after an offer is made. Earnest money, also known as a good faith deposit, is money that a buyer puts down to demonstrate to the seller that they are serious about purchasing the home. This deposit is usually 1-5% of the purchase price. Since earnest money comes early in the home buying process, many buyers wonder – is my earnest money refundable if the deal falls through?
Is Earnest Money Refundable?
Earnest money is usually refundable if the home sale falls through for reasons not caused by a buyer default, such as home inspection issues, appraisal problems, or title concerns. However, if the buyer simply changes their mind or fails to uphold the purchase agreement, the earnest money deposit may become non-refundable and gets paid to the seller.
When Is Earnest Money Refundable?
In most cases, earnest money is refundable to the buyer if the sale does not go through for reasons that are not the fault of the buyer. Some common situations where earnest money is returned include:
- The home does not appraise for the purchase price. If the appraisal comes back lower than the price agreed upon by the buyer and seller, the buyer often has a right to walk away and get the earnest money back.
- The buyer is unable to secure financing. If the buyer cannot get approved for a mortgage loan, the deposit can be returned as long as there is a mortgage contingency in the purchase agreement.
- The home does not pass inspections. If issues are uncovered during the inspection period provided for in the contract, the buyer can cancel and receive the earnest money deposit back.
- The title is not clear. Any unresolvable issues that arise when the title company does their due diligence would result in a refund to the buyer.
- There are issues with the seller. If the seller decides to take the home off the market, cancels the sale, or cannot prove they have legal rights to sell, the earnest money will be refunded.
Essentially, if the buyer has acted in good faith but cannot move forward due to problems outside of their control, the deposit is usually refundable.
When Is Earnest Money Non-Refundable?
While there are many scenarios where a buyer will get their earnest money back when a deal is canceled, there are also situations where it can become non-refundable:
- The buyer simply changes their mind. If there are no major issues with the home and the buyer gets cold feet after attorney review is complete, the seller generally has the right to retain the earnest money.
- The buyer does not follow through with contingencies. If the buyer waives the appraisal, inspection or other contingencies, those no longer serve as valid basis to terminate the contract and still receive the deposit back.
- The buyer fails to secure financing. If the buyer does not take the necessary steps to apply for and secure a home loan, the seller can keep the earnest money.
- The buyer fails to close. If the closing date arrives and the buyer fails to close,, the earnest money may well be forfeit.
Essentially, earnest money is meant to show a serious intent to purchase. If the buyer simply chooses to walk away without cause or does not uphold their end of the bargain, the seller has the right to keep the deposit.
How Is a Dispute Handled?
In rare cases, there may be a dispute about whether the earnest money should be refunded or not. How does this get resolved?
First, the buyer and seller, or their attorneys, should attempt to come to an agreement themselves. However, if that is not successful, the dispute would be referred to whoever is holding the deposit. This is usually the Settlement agent or Title Company or Closing attorney.
The stakeholder would review the terms of the purchase agreement and attempt to have the parties agree to either release the funds to the buyer or seller. Either party could also choose to take the issue to mediation, arbitration or a court with jurisdiction to get an independent ruling on the dispute.
The court system is a last resort to settle an earnest money dispute, as this option takes a significant amount of time and money.
While putting down earnest money shows a buyer’s good faith, it also carries some risk. Make sure you fully understand the terms under which your earnest money could be refunded or forfeit before putting down a deposit.
Most of the time, if the deal falls through due to problems with the home, financing, or title, the buyer will get their earnest money back. But if the buyer simply has a change of heart or doesn’t uphold their end of the bargain, they risk losing the deposit.
In case of any disagreement over earnest money refunds, first seek resolution between yourself and the other party. Rely on the advice of your Realtor, attorney or other real estate professional if possible. Seeking arbitration or going to court should be a last resort when disputes arise.
The question of “is earnest money refundable?” depends on the specific circumstances of why the home sale falls through. While earnest money shows a buyer’s serious intent, it also provides some protection if issues arise through no fault of their own. Make sure to understand when you could get your earnest money back – and when it may be forfeit – before putting down a good faith deposit. With the right information, you can proceed confidently through the process of buying a home.