Is Earnest Money Refundable?

An earnest money deposit is a payment made from a buyer to a seller that shows you’re serious about purchasing their property. Earnest money is normally paid when the buyer’s offer has been accepted and is held in escrow until the sale is finalized. 

Since earnest money is paid at the beginning of the home-buying process, there’s always the chance of losing your deposit if the deal falls through. However, as long as you stick to the terms and conditions of your purchase contract, your earnest money deposit should be refunded in full.

In this article, we’ll discuss scenarios when earnest money is refundable, when it’s not, and how to protect your deposit in a real estate transaction.

When is earnest money refundable?

Earnest money is typically refundable when the buyer meets all contingencies and deadlines outlined in the purchase contract. If the following contingencies are not met, the buyer can get their earnest money deposit back. 

Inspection contingency

An inspection contingency allows the buyer to back out of a real estate transaction if a home inspection reveals significant property damage. In this scenario, the buyer can ask the seller to either cover repairs or reduce their sales price. If the buyer and seller can’t reach an agreement, the buyer can cancel the contract, penalty-free, and request a full refund of their earnest money deposit.

Financing contingency

A financing contingency allows the buyer to back out of a deal if they're unable to secure a mortgage loan before the closing date. In this scenario, a buyer can ask the seller to either reduce the price of the home to the amount approved by the lender or cancel the contract and reclaim their deposit. As long as the buyer makes every effort to obtain adequate financing by submitting the necessary paperwork on time, the denial is out of their control and their financing contingency should hold.

Appraisal contingency

An appraisal contingency allows the buyer to walk away from a home purchase if the home is appraised below the agreed-upon purchase price. In this scenario, a buyer can either negotiate a lower sales price or withdraw their offer. For example, if you agree to buy a home for $500,000, but the home appraises for $475,000, you can either ask the seller to lower their sales price or cancel the purchase contract and get your earnest money back.

Home sale contingency

A home sale contingency allows the buyer to cancel their purchase contract for a new home if they’re unable to sell their current home. In this scenario, a buyer is not responsible for following through on a perfectly good deal if they can’t find the right buyer for their existing home. As long as you have a home sale contingency in place and you’ve made an honest effort to sell your current home, you can cancel your purchase contract and receive a refund on your earnest money. 

When is earnest money non-refundable?

Earnest money is not always refundable, especially if the buyer doesn’t have any contingencies in place or fails to hold up their end of the bargain. Here are a few scenarios in which it’s likely you won't receive your earnest money deposit back. 

Contingency waivers 

Buyers often waive purchase contract contingencies to make their offers more attractive to sellers. Contingency waivers are common in seller’s markets when multiple buyers are competing for a limited number of properties. However, buyers should know that by waiving their contingencies, they’re also waiving their right to recover their earnest money if certain conditions aren’t met. 

Waiving contingencies limits your refund opportunities. It’s usually not advised for buyers to waive their contingencies unless they’re absolutely sure about the property they’re purchasing.

Contract breaches

It’s also unlikely for a buyer to get their earnest money back if they fail to meet the terms and conditions of their purchase contract. Common breaches of contract are failure to meet payment deadlines, delaying important paperwork, and backing out of a deal without a valid contingency. 

Buyer's remorse can also come into play if a buyer quickly signs a purchase contract with no contingencies and finds a better deal later on. If a buyer breaches their purchase contract without any protections in place, the seller can keep the buyer’s earnest money deposit as compensation for the breach.

How to protect your earnest money deposit

Buyers can protect their earnest money deposit in a few ways. The first thing you should do is include contingencies that apply to inspections, appraisals, and financing. This allows you to recover your earnest money deposit in several situations, including if you discover major property issues, the home is appraised below its sales price, or your mortgage application is denied. 

You should also carefully read the purchase contract terms and conditions. Although the purchase contract is usually drafted by the buyer’s agent when they submit an offer, the contract might go through some edits on the seller’s end before both parties sign. Be sure to read the fine print to avoid any surprises.

Lastly, it’s always best to employ a trustworthy escrow or title company to handle your earnest money. If disputes arise in the future, you will be at ease knowing your escrow agent will handle the money ethically.

Final thoughts on getting your earnest money deposit back

A buyer’s earnest money deposit is refundable unless they decide to walk away from the home purchase for reasons not specified in the contract. Purchase contract contingencies often protect buyers from having to forfeit their earnest money in different scenarios, so it’s best to include them in your purchase contract. It’s also advised to hold your earnest money in an escrow account to make sure your deposit is handled fairly and handed over to the appropriate party.

*An equal housing lending. NMLS #10287