Everything to Know About Earnest Money Deposits

Many first-time buyers don't know the full financial obligation of buying a house before beginning the process. With so much emphasis placed on saving for a down payment, it's easy to lose sight of the other aspects of the transaction and their financial impact. This includes the earnest money deposit. Whether you are a first-time buyer or not, it's important to understand what an earnest money deposit is — and how you can lose it when buying a house.

What is an Earnest Money Deposit?

When you place an offer on a home that the seller accepts, you're laying the foundation for the entire transaction. As a part of the purchase offer, the buyer commits to a financial obligation with a small deposit. The earnest money deposit, also called an escrow deposit or good faith money, directly follows the signing of the sales contract or purchase agreement. The deposit amount is typically between one and 10 percent of the sales price; however, it differs depending on the transaction.

When Would I be Eligible for a Refund?

Pay close attention to the contract as it will outline if and when a buyer may seek a refund for this deposit. Often, the only way to prevent yourself from losing your deposit is with a home inspection, funding, or appraisal contingency in the contract. This states that if the home is appraised for a much lower price than you offered or the inspection uncovers serious problems, you may back out of the deal and get your money back. You may also be able to back out and get your deposit back if your mortgage loan falls through.

How Can I Lose My Deposit?

Unfortunately, losing your earnest money deposit may be easier than you believe. There are three surefire ways to lose your earnest money deposit when buying a house:

1. You've got cold feet and want to back out of the sale.
Buying a house is a huge commitment that some buyers don't fully understand until they've signed the purchase agreement. Backing out of the sale of a home simply because you've personally reconsidered is not permitted and therefore will not be cause for getting your earnest money deposit back.

2. You've waived away your contingency rights.
When buying a house, always read and understand the stipulations of the contract. Real estate agreements often have contingencies like allowing you to remove yourself from the sale and retain your earnest money deposit if the inspection fails or there are financing issues. Buyers will waive these rights to make their offer more attractive to the seller; however, if you've waived your contingency rights and the inspection were to fail or if the house is appraised for less than it's listed, you'll either need to complete the sale or lose your deposit.

3. You've neglected the agreed-upon timeline according to the contract.
Your purchase agreement will include several new responsibilities you must tend to within a specific time frame. This includes securing financing from a mortgage lender, completing a home inspection, getting an appraisal conducted, and setting availability to schedule closing. While some sellers will extend these time limits within reason if requested, you're contractually obligated to meet these demands, or you can forfeit your earnest money deposit.

Buying a house is one of the most significant decisions and investments you'll ever make. While it is common to have some uncertain thoughts in this process, remember that you are responsible for keeping up your end of the bargain — morally and legally.

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