If you want to win a bid on a home, you should put earnest money down on it. This lets the seller know that you are a serious buyer and won’t back out of the contract.
What happens if you need to back out of it at some point though? It’s been known to happen. Do you lose the money you put down on the home?
Since earnest money can be as much as 1% – 3% of the home’s purchase price, we aren’t talking about a small amount of money here. Luckily, there are ways to get your earnest deposit back, but you have to follow the letter of the law.
The Brief Window of Opportunity
You may have a small opportunity to get your earnest money back shortly after you deposit it with an escrow agent. The escrow agent is the third party that holds the funds. They don’t go directly to the seller. The seller can’t have the funds until the escrow settles, or in other words, when the loan closes and the house sells.
Once you deposit the funds with the escrow agent, your jurisdiction may allow around 48 hours to ask for a refund. Keep in mind that each jurisdiction is different, so you should check with your realtor and/or real estate attorney to find out the laws in your area.
You should also know the proper procedure to request the refund. Some areas require the request in writing or with a specific form. If you don’t follow the rules, the seller could argue that you didn’t request the funds properly and fight to keep the earnest money even after you back out of the sale.
Contingencies and Escrow Money Refunds
Even if you pass the short window of opportunity of having buyer’s remorse, you may still have the option to get out of the contract with your earnest money in hand. This is possible if you have contingencies in your purchase contract.
Contingencies are opportunities to back out of the contract if a specific condition doesn’t occur. If this is the case, you may be able to request the return of your earnest money.
Here are the most common contingencies:
- Financing contingency – You can request a specific amount of time to get your financing in order. If you fail to get a ‘clear to close’ before the expirationof this contingency, you have the right to back out of the contract and not lose your earnest money.
- Home sale contingency – If you have a current home you need to sell before you can qualify for financing on the new home, you can set up this contingency. If you don’t have an executed purchase contract on the home by the specified date, you can back out of the sale and keep your earnest deposit.
- Inspection contingency – You have a specific period to have the inspection performed and for you to review the report. If the inspector finds things wrong with the home that affectsits livability or value, you can back out of the contract. Of course, you also have the chance to negotiate with the seller if you think he/she can fix the issues, but you should do this before the inspection contingency expires. If things don’t go your way, you can back out of the contract.
- Appraisal contingency – You also have a specific period to have the appraisal performed. If the appraiser finds that the home isn’t worth as much as you agreed to pay, you have an issue. You can either pay the difference between the value and the agreed upon price or negotiate the sales price with the seller again. If neither of these options work, you can back out of the sale if you have an appraisal contingency on the home.
The contingencies aren’t automatically in every purchase contract. You have to request them and make sure that the seller accepts them. Some sellers won’t accept a contract with any contingencies. If that’s the case, you may want to look at a different home anyway. It’s important to work with your real estate attorney on this topic to make sure that if you walk away, you still have your earnest money in hand.
If you back out of the purchase outside of the small window of no-questions asked and after all contingencies expire (or you didn’t have any contingencies), you may lose your earnest money. It’s up to the seller on how he wants to proceed. Some sellers are willing to give the earnest money back, especially if it’s a serious reason that you backed out of the contract. Other sellers keep the money and they have every right to do so.
If there is a dispute regarding the ownership of the earnest money, the escrow agent keeps the money in his possession. He will do this until the dispute is settled either among the two of you or with the help of attorneys.