Earnest money is a deposit the buyer makes on the home once a seller accepts their offer. It is considered a “good faith deposit,” demonstrating the buyer’s serious intent to purchase the property. While the amount is negotiable, earnest money is usually about 1-2% of the total purchase price. The contract also specifies when the earnest money is due to the title/escrow company (typically within 2 days of a signed purchase contract).
Earnest money is an important term of the purchase and sale agreement. If sellers receive multiple offers, they may favor the one with the higher earnest money deposit since the buyer is putting more skin in the game.
How is the earnest money used?
If the sale closes successfully, the earnest money gets applied toward the buyer’s down payment or closing costs; it’s not an additional expense. But if the sale is terminated or canceled, the contract conditions determine whether the buyer or seller can keep the earnest money.
Can my earnest money deposit be refunded?
Buyers might include certain contingencies or conditions which must be met in order for the sale to proceed. For example, a home inspection contingency allows the buyer to get a home inspection before committing to purchase it. A financing contingency ensures that the buyer isn’t penalized if they fail to qualify for a loan. If a buyer backs out of the deal for a valid reason (contingency), they can get their earnest money back. There are many types of contingencies that buyers can include in an offer.
Can I lose my earnest money?
If a buyer simply breaks the contract without a valid reason, they may forfeit their earnest money to the seller. This provides some assurance for the seller, offering financial compensation for lost time and effort.
Examples
Let’s look at a few situations that explain what happens to earnest money when a home sale fails to close.
- Example 1: Buyer Greg is under contract to purchase a home. His offer included a home inspection contingency. After getting the home inspected, he decides not to purchase the property. As long as he cancels the contract within the inspection period, his earnest money will be returned to him.
- Example 2: Buyers Linda and Jorge have a contract that includes a financing contingency. But a few days later, Jorge loses his job. They can no longer qualify for the loan, so the financing condition can’t be satisfied. Their contract is terminated and their earnest money is returned to them.
- Example 3: Buyer Tiffany has a contract that includes inspection and financing contingencies. She qualifies for a loan and was satisfied with the home inspection. However, she changes her mind just before closing and decides not to buy the house. She forfeits her earnest money since the contingencies were satisfied, and she had no valid reason to break the contract. The seller keeps Tiffany’s earnest money as compensation for lost time and effort.