Escrow 101: Is Earnest Money Refundable?
December 7th, 2022
The reason you’re here is pretty straightforward: you want to know if you are getting your earnest money back. The real estate industry is full of complexities, so there’s generally a lot of confusion around earnest money, too, especially among first-time buyers or sellers.
Keep reading as we shed some light on this burning question that probably weighs heavily on the minds of many to help you figure out how earnest money works, whether it is refundable, and how you can get it back.
First Things First: What Is Earnest Money?
Earnest money, also known as earnest money deposit, or simply EMD for short, represents the initial funds a prospective buyer is asked to put down once a seller accepts their offer.
Also known as a “good faith deposit” or “good faith money,” earnest money is considered a gesture of goodwill, demonstrating that the buyer is serious about following through with the purchase and incentivized to fulfill their contractual obligations. It’s basically a “monetary promise” to the seller.
Although not officially required by law, making an earnest money deposit is highly recommended and sometimes even necessary in extremely competitive markets.
Why Is Making an Earnest Money Deposit Important?
Earnest money primarily safeguards the seller in case the buyer backs out of the deal or breaks any contingencies listed in the purchase contract, allowing the selling party peace of mind.
However, the earnest money is a win-win situation because it also protects the buyer in case of a breach of contract on the seller’s behalf and improves their chances of securing the sale. Since you are putting money down right from the bat, it speaks that you are more likely to close and helps the seller eliminate any concerns about entering a contract and selling the property to you.
How Does It Work?
Earnest money (also called an escrow deposit) is determined during the negotiating phase, drafted into, and made upon signing the purchase agreement or the sales contract. In most real estate transactions, earnest money funds are held in an escrow account by a third-party title company, lawyer, or bank (or wherever specified in the contract) until closing, when it’s disbursed to the buyer's down payment and closing costs.
You’re also probably wondering: How much is an earnest deposit? Since earnest money is negotiable, there's no fixed amount. The average earnest money deposit ranges between 1% and 3%, although it can get as high as 10% in highly competitive real estate markets. It depends on numerous factors, such as the competitiveness of the market, the type/condition of the property being sold, as well as financing.
When Is Earnest Money Due?
Earnest money is typically due within 3-5 days after the sales contract or purchase agreement is accepted and signed, but it can also be attached to the offer. The earnest money deposit can be paid by certified check, personal check, wired to an escrow account, or delivered straight to the seller's agent if possible.
The Burning Question: Do You Get Earnest Money Back?
It depends. Although it most often is, the earnest money isn't always refundable. Let’s put this dilemma to rest once and for all: earnest money is refundable, but only if specific criteria are met by their deadlines.
As long as the sale goes through successfully and no predetermined deadlines or contract agreements are breached, the earnest money is refundable, and home buyers can get an earnest money refund.
When Can You Get Earnest Money Back?
You are not being unreasonable or hard to please if you want to cancel the purchase and get your EMD back – it happens more than you might think. In a typical real estate market, it’s really hard for a buyer to lose their earnest money if they are operating within the agreed timeline and contract contingencies.
However, it can happen, and in certain scenarios, the earnest money deposit may land in the hands of the seller. Let’s explain this in more detail.
· Buyers
Depending on the contingencies listed in the purchase agreement, the buyer can walk away from the contract and receive their earnest money deposit back in full if the seller breaks the contract in any way. Depending on the situation, the seller can even be forced to make additional damage payments or face other consequences for contract violation.
However, the most common contingencies allowing the buyer to back out of the purchase and receive a refund of their earnest money are, for example, a home inspection revealing issues with the property, the property being appraised below the agreed-upon purchase price, or the buyer not being able to get the necessary financing.
· Sellers
Real estate contracts typically go in the buyer's favor, so they usually get to keep the earnest deposit in case of walking out before the final signings. However, the seller gets to keep some or even all of the earnest money if the buyer fails to go through the purchase for reasons not specified in the contract or fails to comply with any contingencies listed in it.
For example, in case of a buyer’s unfounded or unreasonable change of heart, the seller will be entitled to the earnest money funds as compensation for the time their home was taken off the market due to the exclusive purchase agreement.
How to Get Earnest Money Back
In the case of a smooth transaction, the process of getting your earnest money back is relatively straightforward – the deal goes through, you get the property, and the earnest money deposit is credited to you at closing.
However, in case you are backing out of the deal under contingencies listed in the contract, here’s a quick guide on how to get your earnest money back.
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Inform the Seller in Writing
The first step is contacting the seller and informing them about your decision to back out before any contingency deadlines. You cannot simply state you no longer want to buy the property and demand your earnest money back – you must provide a valid reason within the contingencies outlined in the contract.
So, it’s crucial to communicate your reasons for not wanting to continue with the purchase in an official written notice by the required date. Your real estate agent can help you draft one.
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Sign the Earnest Money Release Form
The earnest money release form is signed by both the buyer and seller and accommodates the process of transferring the initial earnest money funding from the nominated escrow account to the entitled receiver. It asserts that the transaction went smoothly or is terminated under contingencies listed in the contract and that both parties agree the earnest money will be returned to the buyer.
In case the parties are unable to agree on the money’s release and the seller refuses to release earnest money, further legal action may be taken. However, since earnest money is held by a neutral third party, it typically does not matter if the seller refuses to refund the earnest money as long as you claim the contingencies in the contract on time.
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Contact the Escrow Company
After signing the earnest money release forms, it’s important that the third party involved – the escrow or title company – is also on the same page with your choice to walk away from the purchase. Inform them of your decision and send them all signed documents.
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Collect Your EMD
If all is in order, the final step is to collect your money. You should get your earnest money deposit back in a few days. Just make sure to provide accurate payment information to the escrow or title company so they can send it back to you or simply stop by in person to pick up a check.
Who Gets Earnest Money If the Deal Falls Through?
If you're wondering who gets to keep the earnest money if the deal falls through, this also depends on whether the buyer and the seller followed the contract terms, as we previously explained in more detail.
The earnest money amount will be provided to the party legally entitled to it. If the buyer backs out of the deal because of contingencies listed in the contract, within the agreed time frame, or because the seller has failed to follow through with the agreed deal, they will get to keep their earnest money deposit. However, if the buyer breaches the contract in any way, the seller will get the earnest money.
