What Happens to Your Earnest Money
Every year I receive multiple questions from homebuyers who are confused or even panicked about what happens to their earnest money deposit. They usual questions is do you really get your earnest money back. This is one of the most misunderstood parts of the home buying process, and it is critical that buyers fully understand how it works before signing a contract.
What Is an Earnest Money Deposit
An earnest money deposit, often called a good faith deposit, is money put down by a buyer after their offer is accepted. It shows the seller that you are serious about buying the home. In most cases, this deposit is held in an escrow account while the deal moves toward closing.
Where that escrow account is held can vary depending on the state. It may sit with the real estate brokerage, the title company, an attorney, or a separate escrow company. The laws and customs governing earnest money deposits are different in every state, which is why it is so important to speak with a real estate agent familiar with your local market.
How Much Is Typically Required
While amounts can vary depending on the location and the type of property, most earnest money deposits I see range between 1% to 3% of the purchase price. In very competitive markets, buyers may choose to offer more to make their offer stand out, but larger deposits also mean more risk if something goes wrong later in the deal.
Is Earnest Money Always Refundable
In many states, the earnest money deposit is refundable as long as certain protections are in place. These protections are called contingencies, and they give the buyer legal ways to exit the contract if certain conditions are not met.
Common Contingencies That Protect Earnest Money
- Inspection contingency: If the home inspection reveals major issues and the buyer is not satisfied, the buyer can cancel the deal and get the deposit back.
- Attorney review contingency: In some states, buyers have the right to have an attorney review the contract and cancel the deal if problems are found.
- Title review contingency: If title issues are uncovered that cannot be resolved, the buyer can exit and get the deposit back.
- Financing contingency: If the buyer’s lender declines the loan, the buyer can cancel the contract and receive a refund of the deposit.
- Homeowner association document review: If documents reveal problems that the buyer is unwilling to accept, the buyer can walk away and reclaim the deposit.
When You Are at Risk of Losing Your Deposit
The danger comes when buyers move past these contingency deadlines but then change their minds about buying. Once you have waived or passed your contingencies, your deposit may no longer be refundable. At that stage, if you cancel the purchase for reasons not protected by the contract, you are at real risk of losing your entire deposit.
In some situations, the seller may even argue that the loss of the deposit does not fully compensate them for the harm caused by the canceled deal. In extreme cases, sellers have pursued additional legal action against buyers to recover further damages.
Laws Vary From State to State
It is important to understand that every state has its own real estate laws governing deposits, contracts, and escrow. In some states, there may even be different stages of deposit. For example, one smaller deposit may be non refundable upfront, while a second larger deposit is placed once contingencies are cleared. Only a real estate professional or attorney familiar with your specific state’s rules can properly guide you.
My Rule of Thumb
First, always talk to your real estate agent about how earnest money deposits are handled in your state. Second, consider consulting a real estate attorney if you want additional protection or if your transaction involves unusual circumstances. Finally, never sign a contract you do not fully understand.
Final Thoughts
Your earnest money deposit is your financial commitment to the seller, but it also carries risk if you do not fully understand how it works. The best way to protect yourself is to educate yourself before you sign. Work with a real estate agent who can guide you carefully through every step of the process.
If you are buying a home and need a trusted real estate agent to help guide you through your market, I have a strong network of reputable professionals across the country. Feel free to reach out and I will gladly connect you with an agent who will protect your best interests.
