Earnest Money

I'm often asked, "Will I be able to get my earnest money back if the deal doesn't go through?". Well, the answer can be yes or no, depending on the situation. Let me explain. The earnest money is basically a security deposit to let the seller know you are serious about buying their property. The seller is taking a chance with you as a buyer. They are taking their home off the market for the next 30-60 days waiting for closing. If the deal falls through, then they have potentially lost out on any buyers that might have had during that time.

When writing the check for the earnest money, please understand that the title company will cash that check right away. It will not be held until closing, so make sure there are funds in the account to cover the check. If everything goes as planned, the loan is approved, and the home is appraised where it should be, then that earnest money will be credited to you at closing. Clean and simple. The problem arises when it's not so smooth.

For example, let's say you don't get approved for the loan. You should have a 3rd Party Financing Addendum that allows for a set period of time to get loan approval (usually 27-30 days - or it could even be 45 depending on the type of loan and how long it takes to process). If you do not get the loan within that period of time, then you should get your earnest money back. However, if the time period has passed, and you haven't received the final approval for the loan, then you would have to forfeit the earnest money to the seller. That's why it is important to remain in constant contact with your lender to make sure approval is done within the time period set in the 3rd party financing addendum. You might think..."Why do I have to give them the earnest money when it isn't my fault that the bank took too long to process my loan and tell me that I wasn't approved?". Well, it's not your fault that the lender took too long, but it would be your fault if you didn't terminate the contract within the amount of time set in the financing addendum.

If you simply decide that you want to walk away from the deal even though you have been approved for the loan, then you would lose your earnest money. In a case like this, the seller could actually take you to court to try to force you to buy the home anyway, but at a minimum, you would lose the earnest money.

Another example would be with appraisals. If the home does not appraise for the amount of the loan, then you should get your earnest money back as long as you have a Right to Terminate based on Appraisal included with your contract. This also has a period of days to which you must adhere, so keep a close eye on those deadlines to make sure you don't lose your earnest money if the appraisal isn't completed on time.

As with everything, there are exceptions. Different types of loans have different requirements. VA and FHA loans don't require the addendum for the appraisal because that is covered in the 3rd Party Financing Addendum for those types of loans.

The bottom line is this...keep track of deadlines, stay in touch with your lender and appraiser, and don't hesitate to call your realtor if you have any questions. Remember that even if you get your earnest money back, you might be deducted some money for surveys and other expenses that the title company has already incurred on your behalf. There might be hiccups along the way to closing, but if your realtor has included all the documents you needed and you stay on top of things, you should be able to work out any issues along the way. Keep calm and have fun buying that home of your dreams!

The information provided herein is the author’s opinion and provided for general purposes only.  If you have specific questions about anything stated in this article, please contact your real estate professional or attorney for advice.