Purchasing a home is an exciting and significant milestone for many individuals and families. It represents a new chapter in life and often requires a lot of time, effort, and financial resources. To show their genuine interest in buying the property, homebuyers typically provide an earnest money deposit when making an offer. But what exactly is earnest money, and what happens to it at closing? In this article, we will discuss the purpose of earnest money, when it can be refunded, and the different scenarios that may impact the deposit.
Earnest money, also known as a good faith deposit, is a sum of money that a buyer provides to the seller as a sign of their commitment to purchasing the property. It is usually a small percentage of the purchase price, typically ranging from 1% to 5%. The purpose of earnest money is to assure the seller that the buyer is serious about the transaction and to compensate the seller for taking the property off the market. By providing earnest money, the buyer is showing their willingness to move forward with the purchase and cover any costs the seller may incur if the deal falls through.
So, what happens to earnest money at closing? At closing, the earnest money is typically credited towards the purchase price of the home. This means that the amount is deducted from the total amount the buyer owes. For example, if the purchase price of the home is $300,000 and the buyer has provided a $6,000 earnest money deposit, then the buyer would only need to pay $294,000 at closing. However, this is not the only scenario that can occur with earnest money. Let’s take a look at some other possibilities.
In some cases, the purchase contract may allow for the earnest money deposit to be used towards the buyer’s closing costs. This can be beneficial for buyers who may need assistance with their closing expenses, such as loan origination fees, appraisal fees, or title insurance. The earnest money deposit can help offset some of these costs, making it easier for the buyer to complete the transaction.
Another scenario that may occur is a seller’s concession. This is when the seller agrees to pay a portion of the buyer’s closing costs. In this situation, the earnest money deposit may be used to cover the seller’s concession, freeing up the buyer’s funds to cover other expenses. It’s essential to note that the amount of earnest money that can be used for closing costs or seller’s concessions is typically limited by the lender. Therefore, it’s crucial for buyers to discuss this option with their mortgage lender beforehand.
Now, let’s address the question on many buyers’ minds: can you get your earnest money back at closing? The answer is yes, in some cases. One scenario where the buyer may be entitled to a refund is if the seller fails to fulfill their obligations outlined in the purchase contract. For example, if the seller does not complete repairs or provide agreed-upon credits, the buyer may be able to back out of the deal and get their earnest money back. It’s essential to discuss these possibilities with a real estate agent and include contingencies in the purchase contract to protect the buyer’s earnest money.
Another scenario where the buyer may receive a refund of their earnest money is if there is a financing contingency in the purchase contract, and the buyer is unable to secure a loan. This contingency states that the purchase is contingent on the buyer obtaining financing, and if they are unable to do so, they can back out of the contract and receive a refund of their earnest money deposit.
However, there are also situations where the buyer may forfeit their earnest money deposit. One common scenario is if the buyer decides to back out of the contract for reasons not outlined in the contingencies. This could be because the buyer changes their mind about the purchase, finds a different property they prefer, or simply no longer wants to move forward with the transaction. In these cases, the seller may be entitled to keep the earnest money as compensation for taking the property off the market.
It’s crucial for buyers to thoroughly read and understand the terms and conditions outlined in the purchase contract before providing earnest money. In most cases, the deposit becomes non-refundable once the buyer removes contingencies or fails to fulfill their obligations. Buyers should also keep in mind that earnest money deposits are typically held in escrow by a neutral third party, such as the buyer’s real estate agent or a title company. This ensures that the deposit remains safe and secure until
