Do You Get Your Earnest Money Back?

Earnest money is a deposit a buyer provides to demonstrate serious intent to purchase a property. It acts as a good faith gesture, signaling to the seller that the buyer is committed to the transaction.

Understanding Earnest Money

Earnest money is typically held in a neutral third-party escrow account. This account is managed by an independent party, such as a title company, an escrow agent, or a real estate attorney. The funds remain in this account until the real estate transaction closes or until specific conditions for its release are met.

The amount of earnest money is negotiable between the buyer and seller, but it commonly ranges from 1% to 5% of the property’s purchase price. This percentage can vary based on local market conditions, the property type, and the competitiveness of the offer. The purpose of holding these funds in escrow is to protect both parties, ensuring the money is released only according to the contract’s terms.

When Earnest Money is Returned

Buyers are typically entitled to the return of their earnest money if specific conditions, known as contingencies, outlined in the purchase agreement are not met. For example, a financing contingency allows the buyer to receive their deposit back if they are unable to secure the necessary loan approval within the timeframe specified in the contract. This protects buyers from losing funds due to factors beyond their control related to loan qualification.

An inspection contingency provides another common scenario for a return, allowing the buyer to withdraw their offer and recover earnest money if significant issues are discovered during the home inspection and subsequent negotiations fail. Similarly, an appraisal contingency protects the buyer if the property appraises for less than the agreed-upon purchase price, enabling them to renegotiate or exit the contract. A home sale contingency might also allow for a return if the buyer cannot sell their current residence within a stipulated period. Furthermore, a title contingency ensures the buyer receives their money back if unresolvable issues or defects are found in the property’s title.

When Earnest Money is Not Returned

Earnest money is not returned to the buyer if they fail to uphold their obligations as specified in the purchase agreement. This occurs if a buyer withdraws from the purchase for reasons not covered by a contingency. Such actions are considered a breach of contract, allowing the seller to retain the earnest money.

Forfeiture can also happen if the buyer misses deadlines outlined in the contract, such as applying for a loan, completing an inspection, or closing. Failure to adhere to these legally binding deadlines can result in the loss of the deposit. If a buyer waives contingencies and then attempts to back out based on those waived conditions, the earnest money may be forfeited. In these instances, earnest money serves as liquidated damages, compensating the seller for their time, marketing costs, and lost opportunities.

Releasing Earnest Money

The release of earnest money from an escrow account requires specific steps. The escrow agent must receive clear instructions for disbursement. Typically, a written mutual release agreement, signed by both parties, is required to authorize the release of the funds.

This agreement directs the escrow agent on how to disburse the funds according to agreed terms. If parties cannot agree on the release of funds, the escrow agent will not release the money until a resolution is reached. If a dispute persists, the escrow agent may initiate an interpleader action, depositing the funds with a court for judicial determination. This ensures the escrow agent remains neutral and funds are disbursed by judicial decision if parties cannot settle through mediation or arbitration.