If you’ve ever been involved in buying a home, you’ve probably heard about earnest money – which is basically a good-faith deposit that you put down to show the seller that you’re serious about your offer.
Depending upon your market (and how much of a competitive edge you’re trying to give yourself over other would-be buyers), your earnest money can be somewhere between 1% and 10% of the home’s price. That money gets held in escrow until the deal closes and then gets applied to your down payment or closing costs.
What happens if something goes sideways?
Real estate deals don’t always go as planned – but whether you get that money back depends on your contract with the seller and why things didn’t work out. Here are some situations where your money will likely be returned:
- The contingencies kick in: Most purchase agreements include contingencies that give you a way out of the deal without losing your earnest money. If the home fails inspection, you can’t get approved for financing or the appraisal comes in lower than expected, you can generally walk away without losing your cash.
- The seller doesn’t uphold their agreement: Sellers can get cold feet, and some make promises they fail to keep. If, for example, a seller agrees to make certain repairs after the home inspection, you could be entitled to walk away without losses.
- Title issues crop up: A title search can turn up all kinds of issues, and not all of them can be easily resolved. If you can’t get past a problem with the title, you’re allowed to back out of the deal and keep your deposit.
- There’s mutual agreement: Sometimes, both parties to a real estate deal decide that they want to cancel the sale. In that situation, the earnest money should be returned to you short of any clause in the contract that says otherwise.
Understanding the rules around earned money from the start can help you avoid a mistake that could cost you hundreds or thousands of dollars. When an issue does crop up, don’t hesitate to seek legal guidance to make sure that your money is safe.