What your deposit really does in a home purchase.
Below, our friends from Hayhurst Law PLLC discuss what earnest money is and various aspects of it.
When you make an offer on a home, you are telling the seller you are serious about buying it. To show that commitment, most buyers put down something called earnest money. This is a deposit that says, “I’m not just looking, I’m ready to buy.” While it is a common part of real estate transactions, it also carries legal meaning you should understand before you hand over the money. Knowing how it works—and the situations that could affect whether you get it back—can save you from costly surprises later.
What Is Earnest Money?
Earnest money is a deposit you make after your offer is accepted. It is typically a percentage of the purchase price, often ranging from 1% to 3%, and is held in an escrow account until closing. This money is not an extra fee. If everything goes as planned, it is applied toward your down payment or closing costs. In competitive housing markets, a larger earnest money deposit can make your offer stand out, signaling to the seller that you are a committed and reliable buyer.
Why Sellers Require It
Sellers want reassurance that buyers will not back out without good reason. Earnest money shows you are committed and willing to risk a small amount if you walk away for reasons not covered in your contract. It also gives the seller confidence to take their home off the market while the sale moves forward. Without this deposit, sellers may hesitate to accept your offer, especially if there are multiple interested buyers.
When You Can Get It Back
If your purchase agreement has contingencies, you may be able to get your earnest money back if those conditions are not met. Common contingencies include:
- The home inspection reveals serious problems.
- The appraisal comes in lower than the purchase price.
- You cannot secure financing after making a good-faith effort.
If one of these situations occurs and you follow the terms of the contract, you can usually recover your deposit. That is why it is critical to read your agreement carefully and work closely with your real estate agent or attorney to make sure these protections are included.
When You Could Lose It
If you walk away from the deal without a valid reason allowed by the contract, the seller may keep your earnest money. This is meant to compensate them for the time, effort, and potential offers they lost while the home was under contract. Even delays in meeting deadlines—such as failing to submit required documents—could put your deposit at risk.
The Role Of A Real Estate Attorney
A real estate attorney can:
- Review your purchase agreement to protect your earnest money.
- Make sure the contingencies are clearly written.
- Advise you on whether you have grounds to recover your deposit if problems arise.
- Help resolve disputes over escrow funds.
Earnest money is more than just a handshake. It is a legal promise that you are committed to buying the home. Understanding how it works, when it is refundable, and when it is not can protect you from losing money unnecessarily. Taking the time to clarify the details before you sign can ensure your deposit works for you, not against you. A motorcycle accident lawyer who is also licensed as a real estate attorney, can explain earnest money and how it may pertain to your particular situation.