Do You Get Earnest Money Back if an Offer Is Not Accepted?

Earnest money demonstrates a buyer’s serious commitment in a real estate transaction. It assures a seller an offer is made in good faith and provides security while the property is off the market. Understanding its return or forfeiture conditions is important for buyers and sellers.

Understanding Earnest Money

Earnest money is a deposit made by a home buyer to a seller, signaling a genuine intention to purchase the property. This amount is typically not given directly to the seller but is instead deposited into an escrow account. A neutral third party, such as a title company, attorney, or real estate broker, holds these funds until the transaction closes or is otherwise terminated. The deposit compensates the seller if the buyer defaults without a valid reason, preventing losses from taking the home off the market.

The amount of earnest money can vary, ranging from 1% to 10% of the home’s purchase price, though 1% to 3% is common. In competitive markets, a higher deposit might be required to make an offer more attractive to a seller. If the sale completes, earnest money applies towards the buyer’s down payment or closing costs. It is an upfront portion of the buyer’s total financial obligation, not an additional expense.

Conditions for Earnest Money Return

Earnest money is returned to the buyer if the seller does not accept the offer. Beyond this, the purchase agreement includes contingencies allowing a buyer to withdraw and receive earnest money back. These protect the buyer from unforeseen circumstances during the transaction.

A financing contingency allows the buyer to exit and reclaim earnest money if unable to secure a mortgage. This includes not qualifying for the loan or if the property fails lender standards. Clauses specify a 7 to 21-day timeframe for loan approval.

A home inspection contingency permits cancellation if significant issues are discovered during a professional inspection. If major problems are found and parties cannot agree on repairs or price adjustments, the buyer can back out and recover their deposit. This contingency has a deadline, often 7 to 10 days after offer acceptance, for inspection and negotiations.

An appraisal contingency safeguards if the home’s appraised value is less than the purchase price. If the appraisal is low, this allows the buyer to renegotiate or terminate and receive earnest money back. If the seller backs out for reasons not specified in the contract, the buyer is entitled to a full refund.

Circumstances Leading to Earnest Money Forfeiture

A buyer risks losing earnest money by failing to fulfill purchase agreement obligations without a valid contractual reason, known as buyer default. If a buyer simply changes their mind and decides not to proceed with the purchase, and no contingency protects their withdrawal, the seller may be entitled to keep the earnest money.

Failure to meet contract deadlines can also lead to forfeiture. For example, if the buyer misses loan application deadlines or other critical dates for inspections, they may breach the contract. Earnest money can then compensate the seller for the property being off the market and incurred expenses.

Buyers can also lose earnest money if they waive contingencies and then withdraw for a reason that would have been covered. Waiving contingencies, like inspection or financing clauses, makes an offer appealing but removes buyer protection. If a buyer proceeds without safeguards and backs out due to an issue a waived contingency would have addressed, the seller may claim the deposit. Forfeiture conditions are detailed in the signed purchase agreement.