In the context of buying a home, earnest money is a deposit made by the buyer to demonstrate their serious intent to purchase the property. This deposit shows the seller that the buyer is committed and usually gets held by a neutral third party, such as an escrow or title company, until the sale closes.
The “return of earnest money” happens when the buyer gets this deposit back after the transaction falls apart under certain conditions established in the purchase contract, called contingencies. These contingencies act as protections allowing the buyer to cancel the contract and reclaim their deposit if things like financing or inspections don’t go as planned.
Common contingencies include:
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Home Inspection Contingency: Allows the buyer to cancel the sale and get their earnest money back if a professional inspection uncovers significant problems with the property. Learn more about home inspection contingencies.
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Appraisal Contingency: Protects the buyer if the property appraises for less than the agreed purchase price. If the appraisal is low, the buyer can back out and retrieve their earnest money. Explore appraisal contingencies.
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Financing Contingency: Enables the buyer to cancel the deal and recover their deposit if they fail to secure a mortgage loan. This is essential in case of job loss or unexpected credit issues. Details on financing contingencies can be found here.
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Title Contingency: Gives the buyer the right to back out without penalty if a title search reveals legal issues like liens or ownership disputes.
To receive a return of earnest money, the buyer must typically notify the seller in writing before the contingency period expires and follow the terms of the purchase agreement. Both parties usually sign a release form authorizing the escrow agent to refund the deposit.
Buyers risk forfeiting their earnest money if they withdraw from the deal for reasons not covered by contingencies, miss deadlines, or waive contingencies voluntarily. Examples include changing their mind without cause, missing inspection or financing deadlines, or opting not to enforce contingencies to make a more attractive offer.
Typical earnest money deposits range from 1% to 3% of the purchase price but can vary by market conditions.
Understanding the terms of your purchase agreement and the contingencies it includes is critical to protecting your earnest money. Consult your real estate agent or legal advisor to ensure you know your rights and obligations.
For authoritative guidance, see the Consumer Financial Protection Bureau’s explanation of earnest money deposits: CFPB – What is an Earnest Money Deposit?.
Sources:
- Investopedia: Earnest Money
- CFPB: What is an Earnest Money Deposit?
