When you put a contract on a house, you’re making a commitment to purchase that property, often secured with something called an escrow deposit. If something happens and you can’t close the deal, you stand to lose that money unless the seller is feeling particularly charitable. However, there are instances when, even if the seller tries to keep the deposit, you may be able to get it back.
You may be able to get your earnest money deposit back, but it depends on the way your real estate contract is written.
Losing Your Earnest Money Deposit
The very nature of an earnest money deposit makes it tough to get back. When you put earnest money down on a contract, it usually accompanies a contract stating your intent to buy the home. The amount of the deposit can vary based on local regulations, but generally, you can expect to pay 1 to 2 percent of the asking price.
If things fall through after the contract is accepted, your first thought will be to get your earnest deposit back. Depending on the way the contract is written and the reason for the termination of the deal, you may be able to get your money back. It’s important to pay close attention to the terms of the deal before you sign the contract and hand money over to your agent.
Paying an Escrow Deposit
When you decide to purchase a house, you make an offer. If the seller accepts, you enter a phase called being in escrow, which kicks off with your real estate agent collecting money from you in the form of earnest money and opening an escrow account. Your deposit will remain in that account until closing, when it will be put toward the purchase of the house.
Even at a small percentage, an escrow deposit, also known as earnest money, will be in the thousands of dollars. You can usually pay by certified check, personal check or a wire transfer. You’ll need to clarify the terms with your agent, who will collect the money, along with your signed contract, and take care of everything from there.
Protecting Your Earnest Money
Before you hand over that check, there are a few things you can do to protect your earnest money deposit. Here are a few things you can do to protect yourself from the start.
- Ask for contingencies. You can request that your earnest money deposit be contingent on your getting financing or the house passing inspection. In a competitive market, you may find this puts you at a disadvantage if other offers don’t have contingencies, but it’s better than losing thousands of dollars due to elements you can’t control.
- Be 100 percent sure before you offer. A home purchase is a fairly long-term commitment, at least lasting for the next few years. Try to avoid acting in haste, even in a competitive housing market. Don’t put an offer on a house until you’re certain, without a doubt, that it’s the home you want.
- Use a trusted real estate agent. You need to make sure you’re dealing with a reputable agent who will put your escrow deposit in a secure account. The wrong agent, or an agent who relies on shoddy third-party title companies, could funnel your deposit directly into the wrong hands.
Rescission Periods for Earnest Money
There is something called a cooling-off period that applies to certain contracts. Unfortunately, that sort of protection doesn’t apply to most home purchase contracts. However, your chances of getting the seller to agree to let you out of the deal likely are higher if you act quickly. At worst, the seller will say “no,” but at least you tried.
Another way you may be able to get out of the contract within hours of placing it is if the seller doesn’t provide information you requested when you put the contract on the home. This is specific to documents like the Residential Property Disclosure Statement or something stating the home is free of lead paint. If these items aren’t provided, you may have grounds to request to get out of the contract without forfeiting your escrow deposit.
Understanding The Three-Day Law
There’s a reason homebuyers often think they have a certain number of days to back out of a contract with a full escrow refund. Federal law lets you get out of a home loan commitment within three days, but this has nothing to do with the escrow money you put down. Unfortunately, it also has nothing to do with getting you out of your purchase contract.
That said, just because you can’t get your earnest money back, that doesn’t mean you can’t get out of the contract. You won’t be stuck with a house that you don’t want. You’ll simply lose the deposit money you put down.
If the Seller Backs Out
There are instances where the seller is the one who backs out of the deal after it’s already in progress. In that case, your escrow money will be refunded in full. Often this happens if you put a contract down with a contingency clause and a noncontingency offer comes in.
The most common reason for a contingency clause is having a home you need to sell before you can buy a new one. Although some sellers will accept contracts with home sale contingency clauses, they have the full right to back out of the deal if a better offer comes in or it takes too long. When that happens, the contract becomes null and void and your escrow money will be refunded.
Getting Your Money Back
Your real estate agent may not be happy about the fact that you’re requesting your earnest money deposit be returned. That agent has, after all, put time and effort into helping you find a home, place an offer on a home and go through the early steps of finalizing the deal. Even worse, the agent has to get the seller and his agent to approve the return. For that reason, you may need to be persistent about the request.
If you’re having trouble getting your earnest money refunded, it may help to enlist the assistance of an attorney who can help. You should be able to find an attorney who will put your escrow refund request in the form of a letter for a nominal fee. If your real estate agent is cooperative, she should be willing to take care of this formal demand herself.
Disputes Over Earnest Money
Unfortunately, the request to get your escrow money back is not always a smooth one. If the seller doesn’t agree that the money should be refunded, and you believe it should, a dispute could follow. When that happens, you can consult two sources: the contract itself and local laws regarding contract disputes over earnest money. You’ll likely find that mediation is required when a dispute happens.
Before consulting an attorney, go straight to the source that is holding the money for all involved parties. Chances are, that source has a procedure in place for exactly this situation. If it’s a title company, they may even be able to resolve things to everyone’s satisfaction. It can help to familiarize yourself with local laws, as well as the terms of the contract, before you approach the title company to make sure your own interests are protected.
- What Is Earnest Money And How Much Is Enough? | Rocket Mortgage
- Century 21: Earnest Money: FAQs
- Realtor.com: 6 Times You Really Can Get Your Earnest Money Back
- What is Contingent vs. Pending - Redfin
- YourFreeLegalForms: Return Request of Earnest Money Deposit
- NOLO: Earnest Money: What Happens When Your Home Purchase Falls Through
- Eric Stewart Group: Everything You Need to Know About Earnest Money Deposits
- Internal Revenue Service. "Instructions for the Requester of Form W-9." Accessed July 22, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.