Most sellers request an earnest money deposit when you sign a purchase contract. The earnest deposit gives the seller reassurance that you won’t keep shopping for another home and ditch the contract you just signed. It gives the buyer financial responsibility and gives the seller a reason to take the home off the market.
What if you can’t get financing, though? Will you get your earnest money back?
It’s Not Guaranteed
Looking from the outside, you’d think it makes sense. You put money down on a home in earnest of purchasing it. If you can’t secure the financing you thought you could get, you should get your deposit back, right? That’s not how it works, though. Let’s look at it from the seller’s perspective.
If you agree to buy a home for a specified price, the seller counts on that sale. Sellers usually have plans contingent on the sale of the house. If you back out of the sale mid-contract, the seller now starts from the beginning. In the meantime, the seller probably didn’t actively show the home to other potential buyers. The earnest money helps compensate the seller for the lost time and inconvenience of taking the home off the market.
There’s a way to get your money back though and if you have the right attorney, you should be in good shape.
The Financing Contingency Helps You
A financing contingency can help you get your money back if your financing falls through after signing a contract. The financing contingency is a part of the real estate contract. You ask for the stipulation that if you don’t secure mortgage financing within ‘x’ number of days, that you get an earnest money refund. Each financing contingency will have different terms based on the situation.
Keep in mind that seller’s don’t have to accept a financing contingency. Your attorney can help you work out those details. Sometimes sellers only want to allow a certain amount of time for the financing contingency, while others only want buyers that know beyond a reasonable doubt that they have financing.
If you find a willing seller that will accept the financing contingency, though, you must work fast. Before you sign the contract, make sure you choose your lender and have a pre-approval already. The pre-approval should show the loan amount you could borrow, the estimated interest rate, estimated mortgage payment, and the conditions you must satisfy to close on the loan. Make sure you can satisfy the conditions within a reasonable about of time. The faster you work with the lender to satisfy the conditions, the faster you can have solid loan approval and not have to worry about your earnest money.
You are on a Schedule
Even if you have a financing contingency in place, you only have a short time to back out of the contract. If the financing contingency gives you two weeks to secure financing, act fast. Once you pass that two-week mark, you can’t get an earnest money refund if you don’t get approval for financing.
If you know you won’t secure financing within the allotted time, you must request the return of your earnest money in writing. Read the purchase contract carefully to find out the exact procedure required. Some lawyers request advance notice or certain types of proof that the financing fell through. If you don’t meet the requirements for the refund by the last date of the financing contingency, you risk losing your earnest money deposit.
Keep in mind that the financing contingency itself must be in writing. Don’t accept verbal terms from anyone. If you want a financing contingency, talk to your attorney about working it into the contract. The seller has the right to deny the contingency or the offer altogether, but you can try. If the seller does deny it, you must decide what risks you want to take regarding your earnest money and signing the purchase contract.
You can get your earnest money back if your financing falls through, but only if you take the right precautions. We recommend using an attorney to help you before signing a purchase contract to make sure your rights are protected.