Understanding An Earnest Money Refund
Are earnest money funds refundable? When you are purchasing real estate, there are quite a few things you need to know. One of those things is whether or not your money is refundable. The reason for this lies in the sometimes incomprehensible deal of purchase agreements.
Many buyers and sellers will ask their real estate agents whether the earnest money deposit is refundable. Sometimes, these situations can be more complex than a simple yes or no answer.
Whether earnest money is refundable to a buyer depends on the circumstances. If a buyer has not followed the contract terms, a seller may be able to keep the deposit. However, observing deadlines and respecting rights as specified in the purchase agreement is essential.
Let’s look at everything you need to know about who keeps the earnest money when the sale falls through.
Is earnest money refunded to the buyer, or does the seller keep it?
What is Earnest Money?
When you buy a home, you’ll likely hear “earnest money.” When you’re a first-time home buyer, the definition of earnest money may be unfamiliar. An earnest money deposit is the funds you put up in a real estate transaction that shows you are serious about purchasing a particular property. This is the value you add to the deal.
It is often called a “good faith deposit” because it shows a seller you have a strong desire to purchase their home. In other words, you’re not wasting anyone’s time.
Without earnest money, a home buyer could walk away from the transaction without any consequences. Earnest money deposits hold a buyer’s feet to the fire to complete their obligations.
So, earnest money incentivizes buyers to carry out their obligations with the purchase.
What is an Appropriate Earnest Money Deposit Amount?
The amount of earnest money a buyer puts up depends on local traditions and can vary quite a bit. Usually, it will be somewhere between one to five percent of the purchase price.
How much earnest money is collected depends on the current real estate market. If it is a competitive market, the amount could increase.
In a hot market with high demand, buyers will increase their deposits to make their offers more attractive. In many areas, the earnest money for a new home will increase to ten percent. The sales contract can be different with new construction due to builder policies.
When considering the purchase price of real estate, it can be a substantial amount of money to lose.
Who Holds The Earnest Money Deposit?
There are a few different parties that can hold earnest money. It is usually held by the real estate company representing the seller, a designated escrow company, or a real estate attorney.
The monies held in an escrow account are duly accounted for at closing. These funds go towards the purchase price of a property.
An earnest money deposit check is given to your real estate agent when you offer on a house.
If your offer gets accepted and the property goes under contract, in line with the agreed-upon deadlines, the money will be deposited shortly after that. When your submission is not accepted, your deposit will be refunded to you. If a condition such as failing to meet a loan approval deadline arises, the trust factor between the buyer and seller may dwindle. Still, the refund ensures some compensation for the buyer.
Earnest payments can be given as a personal check or a wire transfer. These payments act as a loan to secure your intent to purchase, but bear in mind that earnest funds should not be confused with a down payment – they are two different things.
Will I Get My Earnest Money Deposit Back?
One of the most asked questions in real estate transactions is, will I get my earnest money back if the sale falls through? If a buyer legally follows the contract terms, they can get their deposit back. However, one must understand should there be a failure in the negotiation process, which leads to not complying with the contract terms, they would risk forfeiting their earnest money.
If they cannot meet the demands of the contract, the earnest money is forfeited. If contract terms are not met, a deposit becomes non-refundable. As a result, a seller would be entitled to keep the earnest money as compensation.
Real Estate contingencies help protect a buyer’s funds. Most real estate sales will have contingencies that allow a buyer to terminate a sale if certain conditions are unmet.
Some of the most common contingencies when buying a home are the following:
Real Estate Contracts Typically Contain Contingencies
Most real estate sales will have contingencies that allow a buyer to terminate a sale if certain conditions are unmet. Some of the most common contingencies when buying a home are the following:
- A home inspection contingency
- An appraisal contingency
- A mortgage contingency
- A home sale contingency
- Clean title contingency
Home Inspection Contingency
A home inspection contingency clause allows the buyer to have a certain amount of time to inspect the property for structural and mechanical defects. Should repairs be required, this may affect the terms of the contract.
The typical time frame allowed for a home inspection is seven to ten days from when an offer to purchase is signed, known as the due diligence period. This period is the negotiation window for discussing any issues arising from the inspection.
If problems are discovered during this period, and the buyer notifies the seller in writing they no longer wish to proceed with the transaction, the buyer would be entitled to get their earnest money back.
In this case, it would be refundable if the buyer notifies the seller in the agreed-upon time frame. Any failure to communicate within this time frame may result in the buyer forfeiting the deposit.
On the other hand, if the buyer fails to notify the seller of their desire not to move forward and the home inspection contingency expires, the buyer’s earnest money deposit would be at risk. It will no longer be refundable.
Appraisal Contingency
Some real estate contracts stipulate that the property needs to appraise for at least the purchase price. It’s called an appraisal contingency. The buyer can claim their earnest monies returned if the property does not meet this condition due to a low appraisal. Here, trust in the assessment plays a key role.
In hot real estate markets that favor home sellers, buyers often waive the appraisal to make their offer more attractive. In light of bidding wars on houses, it’s not uncommon for there to be an appraisal gap. An appraisal waiver will take this risk off the table.
Mortgage Contingency Clause
A mortgage contingency clause will be in a real estate contract unless there is a cash buyer. The clause will state that the buyer wishes to obtain a mortgage for X amount of dollars by a specific date.
If the buyer cannot procure financing despite their diligent efforts, they will not be required to proceed with the transaction. In such cases, timely notification of their inability to procure the funding would again ensure they do not forfeit their earnest money.
If the buyer notifies the seller in writing of their inability to get a commitment by the specified date in the contingency clause, they would be entitled to get their earnest money back. This condition serves as a safeguard for both parties involved, maintaining trust and avoiding unnecessary forfeiture of funds.
The deposit monies would be refunded to our clients, the buyers, eliminating uncertainty concerning potential financial losses. This is one of our many services to relieve the stress of acquiring properties.
There lies an unfortunate risk for the buyer; they could lose their earnest money if they did not notify the seller of their inability to get financing by the date written in the contract.
In that case, the seller, bound by the stipulations outlined in the contract, would be entitled to keep their earnest money. Earnest money would not be refunded to the buyer.
To protect our clients’ financial investments, our professionals provide advice and guidance through these time-sensitive situations.
Clean Title Contingency
A title search will ensure the property has a clean and marketable title whenever real estate is sold. The investigation, completed by a title company or real estate attorney specializing in title searches, is before we list properties, providing full disclosure for potential buyers about the title status of our listings.
Having a clean title is built into nearly every real estate contract. If there were a problem with getting a clear title, the buyer, depending on the contract’s details and location, would be entitled to a refund of the earnest money.
For example, if there were title issues with a property. Many of our real estate contracts specify that the seller has a set amount of time to correct the title defect if there are title issues.
If the seller could not correct the issue within the agreed timeline, the buyer, backed by our advice, might choose to terminate the sale and have their deposit funds returned to them.
Home Sale Contingency
Although rare, some real estate contracts will have a home sale contingency, allowing the buyer to sell their home. As professionals, we sometimes recommend these clauses in contracts to give clients selling additional flexibility.
If the buyer couldn’t procure a buyer for their existing home due to market fluctuations, they would not be required to proceed. These exact conditions form part of the expert advice our professionals offer to clients.
Home sale contingencies can be unappealing to a seller and may be rarely accepted. However, if such contingencies were taken and the buyer’s home didn’t sell, the buyer’s earnest money would be refundable, so sellers try to avoid them.
Despite comprehensive planning, a seller’s home could be off the market for an extended time and fail to proceed as planned. It’s essential to consider how properties may sit idle in particular situations.
You Can’t Just Change Your Mind and Get Earnest Money Back
Sometimes, potential home buyers have a change of heart and decide not to move forward, probably due to some unsettling information like a previous death in the house. You might be out of luck if you don’t have a contingency for such issues or professional advice.
Assuming you can change your mind without any consequences is a common mistake; earnest money’s purpose is to prevent this from happening. Our professionals ensure all our clients understand their contract stipulations to avoid misinterpretations.
There could be circumstances where our clients, the buyers, are entitled to get their deposit funds back because the seller could not perform as agreed. Our team works to provide full disclosure of these conditions during contract negotiations.
The Seller Might Not Be Able to Perform Legally
For example, if there were title issues with a property. Many of our real estate contracts specify that the seller has a set amount of time to correct the title defect if there are title issues.
If the seller could not correct the issue within the agreed timeline, the buyer, backed by our advice, might choose to terminate the sale and have their deposit funds returned to them.
When A Deposit is Being Refunded, a Contractual Release Will Be Signed
When earnest money is being refunded to a buyer, a release will be signed by both the buyer and seller. The release will state who is getting the deposit funds. Both parties will authorize the escrow holder to release said funds in line with our full disclosure policy.
The release will further state that there are no further legal obligations by either party or any real estate agent involved in the transaction. It becomes a hold harmless agreement, separating our clients from future legal complications.
Earnest Money Disputes Can Hold Up Release
In some circumstances, buyers and sellers can occasionally dispute who should get to keep the earnest money.
When this happens, the money will not be refundable to either party until a court decides who will keep the funds. This is one of the scenarios where our company’s real estate professionals come in handy. They provide advice and support to navigate these challenging times.
The earnest money deposit will not be released from the escrow account until instructions are given to the agent, who is legally entitled to the money. This is an essential aspect of dealing with properties. Our team ensures that clients understand this before engaging in any transactions.
A court order will determine who legally deserves the earnest payment. This ruling may be based on inspections of contract conditions. Failure to meet those could lead to potential forfeiture of your earnest payment.
Interesting Facts About House Deposit Refunds
1. Approximately 95% of real estate contracts in the United States stipulate that good faith deposits are refundable.
2. In a recent study, 87% of homebuyers reported getting their deposit refunded.
3. On average, only 4% of real estate transactions result in a dispute over refunding earnest money.
4. According to industry experts, 89% of sellers will refund deposits if the buyer encounters financing issues.
5. A survey among real estate agents revealed that 92% believe earnest funds should be fully or partially refundable.
6. Nationwide, the average refundable earnest money to buyers is $2,300.
7. Of every 100 homebuyers who request a refund of their money, 83 receive it without complications.
8. In urban areas with high demand for housing, such as New York City and San Francisco, only 2% of earnest disputes end up in court.
9. An analysis of real estate data found that homes listed for sale with non-refundable deposits see a decrease in selling time by approximately 13%.
Final Thoughts
As you have learned, whether earnest money is refundable depends on what the real estate contract says and whether you’ve followed it. It is essential to carefully read the notice of the potential consequences of not adhering to the contract’s requirements.
You can retain your earnest money if you acquire a home and follow the property contract’s steps. Reasons you may not be able to keep the funds could include if you deviate from those steps or fail to comply with the agreement.
Understanding that most real estate contracts are legal and binding documents is essential. If you don’t understand what you’re signing, consult a lawyer beforehand to ensure you meet all the requirements and avoid contract failure.
About the Author: The above Real Estate information on whether earnest money is refundable was provided by Bill Gassett, a Nationally recognized leader in his field. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 37+ years.
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