Is An Earnest Money Deposit Refundable?

by | Oct 7, 2021 | Closing Process

An earnest money deposit is the cash a buyer offers to call dibs on Real Estate. It’s one of the most important but misunderstood concepts in the home buying process.

If you’re a buyer, naturally, you’ll have a few questions. When can the seller keep this deposit? How can you get it back? Read more to learn the ins and outs of an earnest money deposit.

What is it?

An earnest money deposit tells the seller that you’re serious about closing. Without it, you, as the buyer, could make offers on multiple homes. This would take the seller off the market until you decide which home you like best.

When you make an earnest deposit, it remains in an escrow account or with a Title Company until the sale closes. If everything goes as planned, the earnest money is transferred from escrow and put toward your down payment and closing costs.

Is it refundable?

With the market being hot, buyers are tempted to drop hefty earnest money deposits. But you should know that on occasion earnest money can be forfeited. This means that you might not get your deposit back. Watch out for these scenarios where your earnest money could end up financing a vacation for the sellers:

You waived contingencies

To make your offer stand out, you might have thought about waiving financing and inspection contingencies. If you want your earnest deposit back if something falls through, then don’t do this. The financing contingency guarantees that you will get a refund for your earnest money deposit if your mortgage falls through and the inspection contingency allows you to renegotiate the price or demand repairs if serious defects are found. Sometimes, you can even back out of the sale and get your earnest money refunded. If your contract waives these protections, and you run into a problem, then you won’t be able to get your earnest money deposit back from escrow.

You didn’t follow the timeline

A Real Estate contract typically follows a strict timeline. It specifies the amount of time you have to secure financing, get the home inspected, have the house appraised, and be available for closing. If you’ve made good faith to adhere to the timeline, most of the time, sellers will grant a reasonable extension. But not always. If they include a “time is of the essence” clause in the contract, then the closing date for the sale is binding. If you can’t make it happen on time, the sale could be dropped and you would forfeit your earnest money.

Earnest money deposits stand as protection for sellers. If late in the game you decide that you no longer want to purchase a home, then the sellers get to keep your earnest deposit. This serves as compensation for the time and money the sellers put into listing their home and having to find another buyer.

When it comes to Real Estate, buyers’ repentance can be more painful than a lost deposit. Make sure that the home you’re bidding on is really “the one”.