What Happens to My Earnest Money if My Deal Falls Through?
Wouldn’t it be nice if every real estate transaction closed without a hitch? The reality is, obstacles can sometimes pop up during the closing process and, to protect the seller, most real estate contracts will require potential buyers to put earnest money in an escrow account. But what is earnest money, who handles the escrow account, and what happens to your money if you decide not to buy?
When buying a home, the buyer is usually asked to put down a certain sum of money to show the seller that you’re serious about buying their home. This may also be referred to as a good faith deposit. The amount you put down will depend on the purchase price of the home you’re looking to buy and the housing market in that area. Typically, the earnest money will total about 1% to 5% of the cost of the home you’re hoping to buy. This money is not paid directly to the seller. Instead, it is placed in an escrow account.
An escrow account, according to Bankrate, is “a legal arrangement with a neutral third party, where money is deposited per the terms of a contract.” Depending on where you live, a real estate agent or a title company will act as the escrow agent (i.e. neutral third party). Your earnest money will stay in the escrow account until the home purchase transaction is complete or terminated.
While it is typically up to the buyer to pick the escrow agent, the seller must agree. Your REALTOR® can help you find a reputable and trustworthy agent. MYMOVE™ suggests buyers, “check the credentials of any potential escrow agent, and in no circumstances should a buyer give earnest money directly to a seller.”
When it comes to closings, an escrow agent serves as a neutral third party and is responsible for a variety of tasks including:
- Performing a title search
- Requesting a statement from the seller listing all debt the buyer will take on with the purchase.
- Ensuring the contingencies listed in the contract are met.
- Preparing and recording the deed and other documents related to the escrow.
- Closing the escrow account and dispersing the funds.
What if I decide not to buy, will I get my earnest money back?
It depends on why you are backing out of the deal. There are certain contingencies covered in most real estate contracts protecting the buyer. If you back out of the contract for an approved contingency, you will get your earnest money back.
You can expect your earnest money back if:
- The home doesn’t pass inspection.
- The home appraises below its sale price.
- You are unable to obtain a mortgage.
- The home has title search issues.
You might not get your earnest money back if:
- You don’t meet the deadlines listed in the contract for inspections and appraisals.
- You have a change of heart.
REALTOR® Magazine urges homebuyers to confirm that the home purchase contract describes the duties of your escrow agent because “When the parties cannot come to an agreement as to the release of escrow, and they make conflicting demands for the funds, the escrow agent will generally not be able to release the funds to either party.”
Furthermore, the article suggests contacting your escrow agent immediately if the seller attempts to make a claim on the escrow funds that you don’t agree with. Letting your agent know promptly of the dispute will help stop the funds from being disbursed. You can, and in some states you are required to, enter into mediation or arbitration before taking legal action when escrow funds are in debate.
If the dispute cannot be settled through mediation, your escrow agent will file an interpleader action to be removed from the dispute and your funds will be deposited in the registry of a court. The escrow agent will receive reimbursement for attorney’s fees that are accrued during the filing of the interpleader action. This reduces the amount of your earnest money fund which is why, according to REALTOR Magazine “purchase contracts – and common sense – dictate that buyers and sellers should try to come to an amicable settlement to avoid the cost and other challenges of litigation.”
In most cases, if you decide not to buy a home you have put earnest money down on, you can expect to get that money back. Occasionally, even if you back out of the deal for a reason not listed on the contract (say the location of your job changes), sellers in a competitive market will release your earnest money back to you knowing another deal is just around the corner. Nevertheless, it’s always smart to review the contract, speak with your REALTOR®, and enlist an escrow agent to make sure you don’t lose your earnest money if you do have to back out of a deal.