Do You Get Earnest Money Back if Financing Falls Through?

Earnest money is a financial commitment a homebuyer provides to a seller, demonstrating serious intent to purchase a property. This deposit is typically held by a neutral third party, such as an escrow or title company, in a secure escrow account. The purpose of this arrangement is to assure the seller of the buyer’s commitment while protecting the buyer’s funds until closing.

Understanding the Financing Contingency

A financing contingency, also known as a mortgage contingency, is a protective clause included in a real estate purchase agreement. It allows buyers to withdraw from a home purchase contract without financial penalty, specifically without losing their earnest money, if they cannot secure the necessary mortgage financing. This safeguard prevents buyers from being obligated to purchase a property they cannot afford.

This contingency outlines a specific timeframe, commonly ranging from 30 to 60 days, for the buyer to apply for and secure a loan. The terms of the contingency usually specify the loan type, maximum interest rate, and loan amount the buyer needs to obtain. If the buyer, despite good faith efforts, cannot obtain a loan within this period under the agreed-upon terms, the financing contingency allows contract termination. This ensures buyers can exit the deal with earnest money intact if denied a mortgage or approved for less than needed.

Steps to Reclaim Earnest Money

If financing falls through under the protection of a financing contingency, a buyer must follow specific steps to reclaim earnest money. The initial action involves promptly notifying the seller and their real estate agent in writing of the inability to secure financing. This written notice formally declares the buyer’s intent to terminate the purchase agreement based on the contingency.

Buyers should be prepared to provide documentation, such as a lender’s denial letter, as proof that financing was not secured. Once termination is agreed upon, both buyer and seller typically need to sign an earnest money release form. This form directs the escrow agent, holding the funds, to disburse the earnest money back to the buyer.

Scenarios Where Earnest Money is Not Returned

While a financing contingency offers significant protection, a buyer might not get their earnest money back even if financing becomes an issue. One common scenario is when the buyer chooses to waive the financing contingency in the purchase agreement. If a buyer waives this protection and cannot secure a loan, the seller may claim the earnest money.

Earnest money can be forfeited if the buyer fails to adhere to deadlines outlined in the contract, such as not applying for a loan within the timeframe or missing the deadline to notify the seller of financing issues. If a buyer backs out for reasons unrelated to the financing contingency, such as a change of mind after the contingency period expires, they risk losing their deposit. In such instances, the buyer breaches the contract, and the seller may keep the earnest money as liquidated damages.