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When is earnest money refundable?

On Behalf of | Feb 2, 2022 | Real Estate |

Not every home purchaser provides earnest money. However, people use this “good faith” money to show their interest in a property if they need some time to secure a mortgage, do a title search or take other steps prior to a home purchase. Depending on the market, the earnest money deposit can be anywhere from 1% to 10% of the home’s price.

Earnest money, which is typically held in an escrow account, is usually paid when the parties involved in the transaction sign the purchase agreement. However, a potential buyer can also include earnest money with their initial offer to show their serious interest in the home.

A contract with contingencies is crucial

If the sale is completed, the earnest money is applied to the purchase. But what if it doesn’t?

It’s crucial to have a contract if you’re providing earnest money that lists the conditions under which you will have your money refunded if the sale isn’t completed. These contingencies typically apply to defects, home value and financing. 

For example, buyers should get their earnest money refunded if they back out of the deal because there’s an issue with the home that wasn’t disclosed, like a serious defect that’s discovered in the inspection. It should be refunded if the appraisal shows that the home is worth less than its sale price. A buyer can also try to negotiate a contingency that allows them to get their money back if their financing falls through.

If you’re in a competitive housing market or if you’ve found what appears to be the home of your dreams, an earnest money deposit can give you an advantage over other prospective buyers. However, it’s crucial to protect your money if something beyond your control occurs. Having a solid, well-crafted contract can help you do that.