Do You Get Your Earnest Money Back at Closing?

When a home purchase agreement is made, earnest money plays a significant role in demonstrating a buyer’s commitment to the transaction. This financial gesture assures the seller of the buyer’s serious intent to proceed with the acquisition of the property. Understanding what happens to this deposit, particularly at the closing stage of a real estate transaction, is important for both buyers and sellers.

Role of Earnest Money in a Transaction

Earnest money is a deposit made by a homebuyer to a seller, signifying a genuine commitment to purchase the property. It acts as a form of security for the seller. This deposit is not an additional fee or cost; instead, it forms part of the overall purchase price of the home.

The earnest money is typically paid after the seller accepts the buyer’s offer. These funds are then held by a neutral third party in an escrow account, such as a title company, real estate broker, or attorney, depending on local practice. Holding the funds in escrow protects both the buyer and the seller, ensuring the money is released only according to the terms of the purchase agreement. Earnest money amounts commonly range from 1% to 3% of the home’s purchase price, though this can vary based on market conditions and customary practices in a given area.

Earnest Money Application at Closing

In a successful real estate transaction, the earnest money is not returned to the buyer as a cash refund. Instead, the funds are applied as a credit towards the buyer’s financial obligations at closing, reducing the total cash needed.

The earnest money is most commonly credited towards the buyer’s down payment. For example, if a buyer’s down payment is $50,000 and they provided $5,000 in earnest money, they would then need to bring $45,000 to closing. The funds can also be applied to cover a portion of the buyer’s closing costs, which include various fees associated with finalizing the mortgage and property transfer. Buyers will see this credit clearly indicated on their Closing Disclosure document, which details all financial aspects of the transaction.

Earnest Money Disposition Before Closing

If a real estate transaction does not reach closing, the disposition of the earnest money depends significantly on the terms outlined in the purchase agreement and the reason for the deal’s termination. Buyers can typically recover their earnest money if the contract is terminated due to the failure of a specific contingency, provided they adhere to the contract’s timelines and procedures. Common contingencies include financing, inspection, and appraisal.

A financing contingency allows a buyer to receive their earnest money back if they are unable to secure a mortgage loan, even if they applied in good faith. An inspection contingency permits the buyer to withdraw and reclaim their deposit if the home inspection reveals significant issues that the buyer and seller cannot resolve through negotiation. An appraisal contingency protects the buyer if the property appraises for less than the agreed-upon purchase price, allowing them to renegotiate or terminate the contract without forfeiting the earnest money.

Conversely, a buyer may forfeit their earnest money to the seller if they breach the contract or decide to back out for reasons not covered by a contingency. This often occurs if the buyer simply changes their mind or fails to meet contractual deadlines, such as those for removing contingencies or securing financing, without a valid contractual reason. In such cases, the earnest money serves as compensation to the seller for taking their property off the market and potentially losing other prospective buyers. Disputes over earnest money can arise, and are typically resolved through negotiation, mediation, or, as a last resort, litigation.