When you make an offer on a home, you’ll usually include earnest money – a good-faith deposit between 1% to 3% of the purchase price that shows you’re committed to the purchase. If the sale goes through, it’s applied to your down payment or closing costs. But what happens if the deal falls apart – is earnest money refundable?
Short answer: Yes, earnest money can be refunded, but only if contingencies in your contract cover the reason the deal didn’t close.
This Redfin real estate article will explain when you can expect to get your earnest money back, when you might lose it, and how contingencies safeguard your deposit.
When is earnest money refundable?
Earnest money is typically refundable if the buyer backs out of the deal for a reason covered by contingencies in your purchase agreement. These clauses are designed to protect your deposit, but they only apply if you meet the required deadlines and uphold your end of the contract.
Here are a few common scenarios when a buyer can usually expect to get their earnest money refunded:
1. Home inspection uncovers major issues
If the offer includes a home inspection contingency and the inspection reveals serious problems, like foundation damage, mold, or an outdated electrical system, the buyer can back out of the deal within the inspection period. This allows them to have their earnest money refunded while avoiding a home with unexpected and costly issues.
2. Buyer is unable to secure financing
A financing or mortgage contingency protects buyers who are unable to secure a home loan. Even with pre-approval, unexpected financial changes or lender decisions can prevent final approval. When this contingency is in place, the buyer can typically back out of the deal and have their earnest money refunded.
3. The home appraises for less than the purchase price
An appraisal contingency lets buyers back out of the contract if the home appraises for less than the offered price and the seller refuses to adjust it. Without this contingency, the buyer could be responsible for the difference or risk forfeiting their earnest money if they walk away.
4. Title issues are discovered
During the home-buying process, a title search is conducted to ensure the property is free of ownership disputes, liens, or other legal claims. If the search uncovers unresolved issues that can’t be cleared before closing, a title contingency allows the buyer to cancel the contract without penalty. In this case, the buyer’s earnest money is refunded, protecting them from financial risk tied to hidden claims on the property.
5. Seller backs out of the deal
If the seller withdraws from the contract without a valid reason – such as deciding not to sell or failing to meet agreed-upon terms – the buyer is generally entitled to a full refund of their earnest money. This protection ensures the buyer isn’t penalized for circumstances outside their control and can pursue other properties without losing their deposit.
When is earnest money not refundable?
In most cases, earnest money becomes non-refundable when the buyer breaches the contract or backs out for reasons not covered by the agreement. Even if contingencies exist, failing to follow the contract’s requirements can result in forfeiture of the deposit.
1. Buyer waived contingencies
In competitive markets, buyers may choose to waive protections like the inspection or financing contingency to strengthen their offer. However, doing so limits their ability to cancel the contract without penalty. If problems arise later, the buyer may be unable to recover the earnest money.
2. Buyer misses a deadline
Contingencies only protect buyers within the time frames specified in the contract. If a buyer fails to complete an inspection, secure financing, or take other required steps on time, they may forfeit their earnest money – even if the reason for backing out would normally be covered.
3. Buyer changes their mind
If a buyer simply decides not to proceed with the purchase – whether they got cold feet, found a different property, or another reason not covered by a contingency – the seller is typically entitled to keep the earnest money deposit. This compensates the seller for time lost and potential offers missed.
Common mistakes that can cost buyers their earnest money
Even when buyers include contingencies, certain missteps can still put their deposit at risk. These are often overlooked but can have real consequences:
Failing to clarify the inspection scope
Buyers sometimes assume that an inspection contingency covers all possible issues. If the contingency language is too vague or doesn’t include specific areas (like septic systems, pools, or roofing) and specialty inspections, the buyer may be unable to back out for problems discovered later.
Not fully understanding appraisal conditions
Appraisal contingencies may only allow the buyer to cancel if the home appraises below a specific threshold. Buyers who don’t confirm the terms may assume they’re protected for smaller discrepancies or negotiation gaps, and lose their earnest money deposit if the seller refuses adjustments.
Failing to properly request deadline extensions
Even if a buyer has valid reasons for needing more time – such as completing inspections or securing financing – missing a contingency deadline without a formally approved extension can be treated as a contract breach. This mistake can result in forfeiting the earnest money, even when the underlying reason for the delay is legitimate.
Assuming seller delays or mistakes automatically protect the deposit
Buyers sometimes believe that if the seller misses a deadline, they can cancel without consequence. Most contracts include provisions outlining how buyer deadlines are affected by seller actions, and misreading these can result in losing the deposit.
How buyers can protect their earnest money
Buyers can take several steps to keep their earnest money refundable and reduce the risk of losing it. Staying organized, following the purchase agreement, and documenting each step can help ensure the deposit remains secure.
Key steps include:
- Include clear contingencies in the contract
- Meet all contract deadlines for inspections, financing, and other contingencies.
- Document everything in writing, including contract changes, deadline extensions, etc.
For example, a buyer who completes inspections late without requesting an extension could lose their deposit even if serious issues are found.
FAQs: Earnest money and refunds
Do buyers always have to put down earnest money?
No, earnest money isn’t legally required, but in most markets, it’s standard practice. Without it, the offer may appear less serious, and the seller might choose a buyer who includes a deposit.
When is earnest money due?
Typically within 1-3 business days after the seller accepts the offer, as specified in the purchase agreement.
Where does earnest money go?
Held in a neutral escrow account, the deposit is applied to the buyer’s down payment or closing costs if the sale closes.
What happens if I accidentally miss a deadline in the contract?
Failing to meet deadlines can breach the contract, putting the earnest money at risk. The seller may have the right to keep the deposit if the buyer fails to meet the agreed-upon terms.
Can a buyer extend a contingency deadline to protect their earnest money?
Yes. Most purchase agreements allow buyers to request extensions for inspections, financing, or other contingencies. To protect the earnest money, the extension must be documented in writing and agreed to by the seller. Missing a deadline without a formal extension could result in forfeiting the deposit, even if the reason for the delay is valid.
What happens if the inspection contingency expires?
If the inspection contingency expires and the buyer hasn’t raised concerns or formally requested an extension, the right to cancel based on inspection findings is lost. At that point, backing out of the deal due to inspection issues would likely be considered a breach of contract, and the buyer could forfeit their earnest money deposit.
When can the seller keep the earnest money deposit?
The seller can keep the earnest money if the buyer cancels the contract for a reason not covered by contingencies, fails to meet deadlines, or defaults on the agreement.
How can I get my earnest money back?
To receive a refund, the buyer must cancel the contract according to the terms of a valid contingency and do so within the specified timeframe. The escrow holder will release the funds once both parties sign a release agreement or the cancellation terms are legally resolved.
The post Is Earnest Money Refundable? When You Can (and Can’t) Get It Back appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.
Join The Discussion