When a buyer and seller enter into a purchase agreement, the seller takes the home off the market while the transaction moves through the entire process to closing. Having earnest money keeps the buyer committed to moving forward with the home purchase while also giving the seller enough confidence and insurance to stop accepting new offers.
It’s important to remember that earnest money is different from the down payment. This deposit is usually cashed and held in a neutral third-party, such as the title company’s trust account or the broker’s escrow company account, for safe-keeping until the purchase agreement is either completed or terminated.
Work with a knowledgeable real estate agent to help you understand how much earnest money to offer. If you plan to purchase a home in a neighborhood where cash offers and bidding wars are common, they may recommend a higher good faith deposit as you could risk losing the home to the one with a stronger offer. But if it’s a slow or moderate market, a good faith deposit in the standard range may suffice.
For some loans that don’t require a down payment, such as VA and USDA loans, the earnest money will be applied directly to closing costs. If the earnest money deposit is more than the closing costs, the buyer can get the remainder back.
If you include contingencies with your offer, you’ll get the earnest money back if a contingency isn’t met. For example, if you’ve included a home inspection contingency in your offer and the home inspection reveals structural damage or severe defects, you may choose to cancel the home purchase and your earnest money deposit will be refunded. Additionally, if a financing contingency is included in the contract and your financing falls through because of appraisal or approval issues, you’ll get your money back.
But if you break the contract without cause, back out of the deal for a reason not listed in any of the contingencies, or simply change your mind about the purchase, the seller might be able to keep your earnest money. You may also lose your earnest money if you cancel the deal after your contingencies have passed their expiration dates.
Understanding the terms of your contingencies: Again, your agent or real estate attorney can explain all contingencies and what your obligations are as the buyer, as well as the best way to waive a contingency if that’s the right strategy. Make sure you know your end of the bargain and in what circumstances you would keep or forfeit the earnest money.
Staying on top of deadlines: The contract will likely include a timeline of when things need to be done, such as the inspection or loan approval. If you miss a deadline, the seller might claim you’re in breach of contract, which means they could terminate the agreement and keep your earnest money deposit.
