The deposit you put down for a home purchase is not refundable under certain circumstances.
When making an offer to purchase a home, you must also specify the amount of your earnest money deposit. This is not the same as your down payment; the earnest money deposit (EMD) is an amount held as collateral in escrow for the consideration of the sale. If the sale goes through and escrow closes, your EMD is put toward the down payment and closing costs.
Depending on where you live, you can expect to offer up anywhere from 1% to 10% of the home’s purchase price as earnest money. In some highly competitive markets, buyers are making even larger deposits in an effort to stand out. An EMD tells the seller you are serious about closing.
But pay close attention to your contract and the timeline because there are a few circumstances in which you may lose your deposit if the sale doesn’t go through. Below are three circumstances in which your EMD may be in jeopardy.
You Waived The Contingencies
In highly competitive markets, it’s becoming more common for buyers to waive contract contingencies regarding financing or inspection to present the most attractive offer to the seller. You might be tempted to do the same, but it comes with serious risks.
The financing contingency guarantees you will get your money back if for some reason you can’t secure the loan and you’re unable to purchase the house. The inspection contingency allows you to renegotiate the price or demand repairs if serious defects are found during the inspection.
If your contract doesn’t have such buyer protections and you run into trouble, you won’t be able to get your money back if you abandon the deal. An inspection is always recommended unless you’re planning to tear the structure down. And if you plan on waiving the financing contingency to compete with cash buyers, be sure to obtain conditional approval before signing a non-contingent contract.
You Ignored The Timeline
A typical purchase contract will outline the time frame in which you will need to secure financing, get the home inspected, and be available for closing. Generally speaking, as long as you’ve made a good-faith effort to adhere to the deadlines, sellers will grant a reasonable extension if a lender drags their feet or if there are other extenuating circumstances that delay things.
However, in some cases the seller may include a “time is of the essence” clause. Watch out for this phrase in your paperwork – it means the closing date for the sale is binding.
You Got Cold Feet
If you’re far enough along in the process and there is no problem with the inspection or the loan, you risk losing your deposit if you have a change of heart and cancel the deal. One cannot simply walk away and default on a whim.
The earnest money deposit serves as protection for the seller when they take their home off the market. If late in the game you decide that you no longer want to make the purchase, the seller is entitled to keep the EMD as compensation for the time and money they have to spend to listing their home again and look for another buyer.
Thank you for a clear explanation of when one can get their earnest money back. I wonder if the deposit has to be separate and above the EMD, even though it is later goes to the deposit and purchase costs. Or can one place EMD in escrow with specific knowledge that it will be used to make up the agreed to down payment. I have a feeling that the answer is yes but I’m thinking if you only have enough cash for the down payment only – not EMD AND an additional down payment.