Buying a home is one of the most expensive purchases. Many mortgage programs require buyers to make a down payment between 3.5% and 5% plus pay their own closing costs. However, before you get to the point of paying a down payment and closing costs, you’ll need to make an earnest money deposit to start the buying process.
An earnest money deposit, or a good faith deposit, is customary after finding a home, and you’ll submit your deposit with your written offer. This deposit shows the seller you’re a serious buyer and that you’re committed to the purchase.
This deposit is an important part of the buying process, but sellers don’t pocket this cash. These funds are deposited into an escrow account set up by your real estate attorney or title company. And after the deal closes, your earnest money deposit is put toward your down payment and closing costs.
Minimum earnest money deposits range from $500 to $1,000 for resale properties, and as much as $1,500 or higher for new construction properties. Typically, these deposits are non-refundable. There are, however, situations when you can get an earnest money deposit back.
1. The offer is contingent on the home inspection
When submitting an offer to buy a house, you can make the offer contingent on a satisfactory home inspection. Home inspections aren’t required, but highly recommended. A home inspection can reveal hidden problems with a home, and if the home requires repairs, you can ask the seller to complete these before closing.
But if a home inspection report reveals problems and the seller is unwilling to fix these issues, you can back out of the deal and get your earnest money deposit back.
2. The home appraisal comes back low
A home appraisal is also important in a real estate transaction because a bank will not lend more than a property’s worth. Your lender sends a home appraiser to the property to determine the home’s value. If a home appraises lower than the sale price, you’ll have to renegotiate with the seller.
The seller can either lower the price of the home, or you can make a larger down payment and borrow less from the bank. If the seller doesn’t budge on the price, and if you're not willing to put more money into the deal, you can walk away from the offer and the title company or real estate attorney will return your earnest money deposit.
3. The buyer backs out of the sale
An earnest money deposit says you're committed as a buyer. And since the deposit indicates your commitment, it's important to note that you cannot get your deposit back if you get cold feet and decide not to buy the property after signing a contract.
Once you and the seller reach an agreement, the seller takes the house off the market and begins making repairs to the home per your request. If you back out of the deal for reasons that have nothing to do with the home inspection or the appraisal, the seller can keep your money. On the other hand, if everything is moving along smoothly and the buyer decides to back out, you can get the deposit back.
There are several reasons why a buyer might back out of a sale. Changes to the buyer’s financial situation can result in him no longer being in a position to purchase another house, at which point he decides to stay put in his current home.
4. If you can’t get financing
If you can’t get financing for the purchase, you may or may not be able to get your earnest money deposit back. It all depends on how your sales contract was worded. If you make an offer on a house before you're pre-qualified for a home loan, it’s safer to include a contingency stating the offer is subject to your ability to get financing. This way, you're protected if you’re unable to secure financing from a bank. In this scenario, the seller would have to refund your deposit. If your offer isn’t continent on the ability to get financing, the seller gets to keep your earnest money deposit if you can’t qualify for a loan.
Many real estate agents recommend getting pre-qualified before making an offer on a house, or at the very least, meeting with a mortgage lender to see if you’re a desirable candidate for a mortgage. Financing contingencies are acceptable, but if a property has multiple offers, the seller is more likely to accept the one that doesn’t include a financing contingency.