Another way of asking when can sellers keep earnest money is how can a buyer forfeit it.
When buying a home, the vast majority of the time you will be required to put up earnest money or good faith deposit. The typical earnest money amount is between one to five percent of the purchase price.
Earnest money can be as high as ten percent when buying new construction. Earnest money is usually held in an escrow account by the real estate company listing the property.
However, it is possible that the deposit monies could be held by a title company, real estate attorney, or designated escrow agency.
Earnest money deposits are used to ensure that a home buyer keeps up their end of the agreement.
Without earnest money, a buyer would be free to walk from a deal at any point in time without consequences.
The earnest money is used to protect the seller’s interests in the sale. It gives them some peace of mind the buyer will follow through and purchase their home.
Buyers ask all the time if the earnest money is refundable. What they are asking is can a seller keep my earnest money.
Earnest money deposits are refundable but only when buyers do what they are supposed to according to the contract.
When a buyer does not perform a seller can keep the earnest money. In other words, the earnest money becomes non-refundable.
Let’s look at how a seller could end up keeping a buyer’s earnest money deposit.
The Buyer Walks For No Reason
In real estate transactions, every now and then a buyer will have a change of heart and no longer want to purchase a property. Real Estate agents often call it “buyer remorse.”
When a buyer walks away from a sale without a reason, a seller will be able to keep the earnest money. Situations like this are the major reason why there is earnest money, to begin with.
Before making an offer on a house, buyers should always think things through carefully. Do you really love the house or are you making a hasty decision?
Buyers’ remorse happens more frequently when home buyers get caught up in bidding wars. There is often more buyer’s remorse when it is a seller’s real estate market. Buyers get into bidding wars and spend way more than they wanted to.
Have you ever made a significant purchase only to say to yourself “why did I do that?” It happens.
Buyers need to understand if they walk from a sale without a reason the seller can and likely will keep their earnest money.
It can happen in buyer’s markets too but buyers tend to be more measured.
When Contract Deadlines Are Not Followed Sellers Can Keep Earnest Money
In most real estate contracts, there will be two common contingencies. They are the home inspection and the mortgage contingency clause.
If a buyer does not follow the deadlines in these real estate contingencies then a buyer could be open to losing their earnest money if they do not follow through with the transaction.
Home Inspection Contingency
A buyer will usually conduct an inspection by hiring a professional home inspector. The inspector will thoroughly review the condition of the property inside and out.
The home inspection contingency clause will state that the buyer must conduct their inspection by a given date.
The clause will also state a buyer must report their findings back to the seller by a certain date.
When buyers do not follow these contract dates, they could forfeit their earnest money to the seller if they chose not to proceed with the sale.
Mortgage Financing Contingency Clause
Unless a buyer is paying cash, there will usually be a mortgage financing clause in the purchase and sale agreement.
The mortgage clause will state how much money the buyer will be financing. It will also outline the date by which the buyer has to have a mortgage commitment from the lender.
When a buyer does not notify a seller in writing that they need an extension for financing, the clause will no longer be in effect. The contingency will have expired.
If the buyer is not able to get financing and they have let their mortgage clause to expire the seller would be able to retain their earnest money.
Contracts are meant to be followed. When they are not, buyers put themselves in the unenviable position where they could lose their earnest money to a home seller.
Kick-Out Clause Not Followed
Rather than add a home sale contingency to an offer to purchase which is unlikely to be accepted by a seller, sometimes a kick-out clause is proposed.
A kick-out or bump clause, allows a seller accept a buyer’s offer but continue to market the property in hopes of getting a better offer.
When a second buyer comes along, the seller must notify the buyer and they then have to make a decision. Do they move forward with the transaction or not?
If a buyer’s chooses to move forward and they need to sell their home in order to qualify to purchase, they would be putting their earnest money deposit at risk.
If the buyer was unable to complete the sale, they would forfeit their earnest money to the seller.
Don’t Confuse Earnest Money With Down Payment
There is often confusion among first-time buyers when it comes to earnest money vs. down payment. They are not the same thing! Earnest money funds are a promise to a seller for completing a transaction.
A down payment on the other hand is a promise to the lender when getting a mortgage. Hopefully, you can see this clear distinction. For example, you may put somewhere between 3-5% as an earnest money payment, while your down payment is 20 percent.
It is possible for the earnest money to be part of your down payment. These monies are always duly accounted for at the closing.
What Happens When There is an Earnest Money Dispute?
At times there are disputes between buyers and sellers over who gets to keep the earnest money deposit. In most states, escrow agents cannot independently make a decision on who should keep the monies.
A dispute over who will get the earnest money will lead to it automatically staying in the account until a court of competent jurisdiction decides if the seller or buyer should get the earnest money.
When the parties are in agreement on who gets to keep the earnest funds, there will be a release signed by both parties. For example, if a real estate company was holding the earnest money, they would have both buyer and seller sign the form.
The agreement will state who gets to keep the funds and that both parties will hold the real estate company harmless for said release.
Final Thoughts on Who Keeps The Earnest Money
When a buyer or seller asks “who keeps the earnest money when a sale falls apart”, it depends on who didn’t follow the terms in the contract.
If a buyer doesn’t follow through on one of their commitments, they will lose their earnest funds. On the other hand, if the buyer backs out due to one of their contingencies, the seller will not be legally entitled to their earnest money deposit.
You should now have a much clearer understanding of when sellers can keep a buyer’s earnest money. If not, consult a local real estate attorney.
About the Author: The above Real Estate information on when can sellers keep earnest money was provided by Bill Gassett, a Nationally recognized leader in his field. 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 many Metrowest towns for 35+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
