When you buy a house, there’s always the possibility that something could go wrong and you might not be able to follow through with the purchase. In some cases, you could even lose your earnest money deposit if that happens. This guide explains.
What is an Earnest Money Deposit?
An earnest money deposit is a deposit a buyer makes to show that they’re serious about purchasing a property. The deposit is usually a small percentage of the total purchase price and is held in escrow until closing.
How Much Is an Earnest Money Deposit?
The earnest money deposit can be anywhere from 1 percent to 5 percent of the home’s total purchase price. That means if you’re buying a $500,000 home, your earnest money deposit could be $5,000 or more.
Related: Everything you need to know before you buy a farm in Midland
When Do You Lose Your Earnest Money Deposit?
You can lose your earnest money deposit if you back out of the deal without a contingency. (Contingencies are conditions that must be met in order for the purchase to go through – more on those in the following sections). For example, if you’re buying a house and you have a contingency that says the purchase is contingent on you getting a loan, and you don’t get the loan, then you can back out of the deal without losing your earnest money deposit.
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What Are Contingencies?
There are three main types of contingencies that appear in many home purchase contracts: financing, home appraisal, and home inspection.
The Financing Contingency
The financing contingency says that the purchase is contingent on the buyer being able to get a loan. If the buyer can’t get a loan, they can back out of the deal without losing their earnest money deposit.
The Home Appraisal Contingency
The home appraisal contingency says that the purchase is contingent on the home appraising for at least the purchase price. If the home doesn’t appraise for at least the purchase price, the buyer can back out of the deal without losing their earnest money deposit.
Related: 7 great tips for buying a homesite in Midland, Texas
The Home Inspection Contingency
The home inspection contingency says that the purchase is contingent on the home satisfactorily passing a home inspection. If the home doesn’t pass inspection, the buyer can back out of the deal without losing their earnest money deposit.
What Happens if You Lose Your Earnest Money Deposit?
If you lose your earnest money deposit, the seller gets to keep it. The deposit is usually held in escrow by a third party (like a lawyer or real estate agent). It’s released to the seller after the transaction falls through.
When Can You Get Your Earnest Money Back?
You can get your earnest money deposit back when the transaction gets cancelled through no fault of your own. For example, if you tried in good faith to get a mortgage to buy the home but it fell through, you’re entitled to get your earnest money back (as long as you had a financing contingency in your contract).
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