Is Earnest Money Refundable? It Depends
One of the terms you must become familiar with during your real estate purchase is the earnest money deposit.
It is important to understand several key questions— is earnest money refundable? Does earnest money go towards the down payment? How much earnest money do I need? Where should the earnest money be deposited? and so on.
What is earnest money?
Earnest money is money a buyer is willing to risk losing during the real estate transaction to show the seller that they are serious about purchasing the property.
Basically, it is like saying the buyer is ready to put their money where their mouth is.
If everything goes well in the transaction, the earnest money is applied to the buyer’s down payment in escrow.
This is done by the earnest money being credited to the buyer on the Settlement Statement. At the end of the transaction, this allows the earnest money to be credited towards the buyer’s down payment.
The earnest money helps protect the seller if the buyer ends up breaching the contract.
In other words, if the buyer tries to back out without a valid reason or does not follow the contract, the seller keeps the earnest money deposit as reasonable damages.
How much earnest money is enough?
Most real estate transactions require earnest money. When an offer is submitted home, the buyer’s agent puts the amount of earnest money in the contract.
It is recommended to put 1% to 3% of the purchase price of the home for the earnest money deposit. However, the amount is what the buyer is willing to give and what the seller is willing to accept.
Keep in mind, the more money put down as earnest money, the stronger an offer will be. This is because the seller would be able to keep a larger sum of money if the buyer defaulted on the purchase contract.
Deciding if the earnest money deposit is enough depends on a lot of factors such as how hot the market is, how many offers are on the home, and comfort level.
There is an accepted contract- now what?
Usually, the earnest money is paid in the form of a personal check or wire transfer. However, a real estate agent can check the other box for a different form (like a cashier’s check).
Be sure to understand the risks of wire fraud if the earnest money is sent via wire transfer. Wire fraud is on the rise.
If a cashier’s check is preferred, it is recommended to do it through the buyer’s bank with their normal checking or savings account. This money will need to be sourced, don’t try to use shoebox money to pay for the earnest money.
Trying to use cash for earnest money (or even down payment for that matter) will not be accepted and will most likely be flagged as fraud.
In addition, the earnest money is deposited with either the escrow company or the Broker’s Trust Account. The majority of the time, people decide to send their earnest money to the escrow company – also sometimes referred to as the title company.
Make the wire or the check out to the name of the escrow/title company. It is also recommended that in the memo section of your check, you put “Earnest money for [enter property address]” to help ensure the earnest money is connected to the right file.
Remember, an escrow/title company deals with many files daily, adding small things like this can help make the process be smoother.
Once the earnest money is received, an earnest money receipt will be sent out that will show that escrow has been opened.
Is earnest money refundable?
Now to the burning question… Is earnest money refundable? This is one of the most important things to understand when it comes to earnest money- after all, the idea of losing $5,000 or more can be a very painful thought.
There are several times when earnest money is refundable:
1. Inability to obtain financing: If the buyer has been diligent and made a good faith effort, yet cannot obtain loan approval without prior to document (PTD) and conditions.
A notice of inability to obtain the loan approval must be provided no later than three days prior to the close of escrow date in the contract. If this is done, the buyer would be returned the earnest money.
2. Canceling during the inspection period. For instance, in Arizona, the buyer can cancel at any time during the inspection period and get the earnest money back (unless this has been waived).
This is done by sending back the Buyer’s Inspection Notice Seller Response (“BINSR”) where the buyer checks that they reject the property.
3. When the seller and buyer cannot agree on BINSR terms. The buyer can initially request the seller to repair certain items.
Then, the seller will respond in their own section on what they will and will not complete. If the buyer does not like what the seller has decided to do, the buyer can cancel and get their earnest money deposit back.
4. The home doesn’t appraise. This can be one of the toughest things for a buyer. This is because negotiations are now restarted.
If the seller wants to play hardball, they could try to demand a higher price which could force the buyer to walk away.
While the buyer would get their earnest money back, the buyer will be out of any money used on inspectors and the cost of the appraisal.
The buyer has five days after the notice of the appraised value to cancel the contract and receive the earnest money back.
5. Contingent sale of a home: If the buyer’s contract has a home sale contingency and the home they are selling falls through or the house is not sold before the specified date in the contract, they can cancel the contract and receive the earnest money back.
There are different types of contingencies that can be selected in the buyer contingency addendum, all have clauses where the buyer can receive the earnest money deposit back.
Losing earnest money:
Losing earnest money is not fun so it is important to understand how people lose their earnest money deposit.
Earnest money is not refundable when:
1. There are missed deadlines without good reason. This can cause a potential breach that would allow the seller to cancel and demand the earnest money.
For example, if the buyer doesn’t deliver the notice of inability to obtain the loan approval, the seller can send a cure notice to the buyer. If the buyer delivers the notice, they will get the earnest money deposit back, if not would forfeit the earnest money.
2. Rights waived. You waive the right to getting your earnest money back, while clauses like this are not recommended, it happens.
3. Waiving other contingencies. Waiving inspection or appraisal contingency even though it protects the buyer.
4. Written in the clause. If there is a clause that states your earnest money is forfeited after a specific day.
5. The buyer gets cold feet. The buyer gets cold feet and just wants to cancel. When the buyer is out of the inspection period, it is a lot harder to cancel the purchase contract and get the earnest money deposit back.
The contract was canceled and the earnest money is being refunded- now what?
If the contract and the buyer is entitled to the earnest money, both the seller and the buyer will authorize the escrow company to release the earnest money.
The buyer will need to contact the escrow company to see how they can get their earnest money deposit back. Sometimes a check is mailed, or sometimes people pick up a check at the escrow office.
Take some time to understand the real estate contract.
Whether you have questions like is earnest money refundable? Or does earnest money go towards the down payment? It is important to get proper answers.
To not be caught off guard during the real estate process, ask for a copy of the purchase contract when you first talk to your realtor.
You can then read through the contract, make notes, and ask questions so that you go into your transaction more informed.
While the information is regarded as accurate, readers are advised to check with their local real estate agent since laws and contracts around real estate transactions vary by state.