When you offer to buy a home, you usually put down an earnest money deposit. This guide explains what happens to that money if the transaction falls through.
Can You Keep Your Earnest Money Deposit if a Real Estate Transaction Falls Through?
Sometimes, if a real estate transaction falls through, the buyer forfeits their earnest money deposit. Usually, this happens when a buyer simply backs out of a deal. That’s because the deposit – sometimes called a good faith deposit – is there to assure the seller that it’s okay to take the home off the market because someone’s serious (and ready) to buy it.
But in most cases, particularly when a transaction falls apart through no fault of the buyer, the buyer gets their deposit back. This happens when the seller doesn’t uphold their end of the bargain, or when there’s a contingency built into the contract that protects the buyer’s deposit.
Contingencies are conditions that must be met for the deal to go through. Some of the most common contingencies in a real estate purchase contract include:
- Home appraisal
- Home inspection
Though there are all kinds of contingencies for a wide range of situations, these are the most common. The following sections explain.
One of the most common contingencies in a real estate purchase contract is the financing contingency. This protects the buyer by allowing them to back out of the deal and get their deposit back if they can’t secure a mortgage to finance the home.
The buyer has a certain period of time – usually around 30 to 45 days – to get approved for a loan. If they can’t, they can notify the seller in writing that the financing contingency hasn’t been met and they’re backing out of the deal. The earnest money deposit is then returned to the buyer.
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Another common contingency is an appraisal contingency. This protects the buyer by giving them an “out” if the home doesn’t appraise for at least the purchase price.
The appraisal contingency usually kicks in after the buyer has been approved for a loan. The buyer then has a certain period of time – again, usually 30 to 45 days – to get an appraiser to value the home. If the appraised value is less than the purchase price, the buyer can notify the seller in writing that the contingency hasn’t been met and they’re backing out of the deal. The earnest money deposit is then returned to the buyer.
Home Inspection Contingencies
A home inspection contingency protects the buyer by giving them a way to back out of the deal if the home inspection turns up significant problems with the property.
The buyer typically has between 10 and 14 days to have the home inspected after the purchase contract is signed. If the inspection turns up serious problems, the buyer can notify the seller in writing that they’re backing out of the deal. The earnest money deposit is then returned to the buyer.
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What if There’s No Contingency?
If there’s no contingency in the contract, the buyer usually forfeit the earnest money deposit if they back out of the deal. That’s because, without a contingency, the buyer is essentially breaking their promise to purchase the home.
There are some exceptions, though. For example, if the seller was supposed to make repairs to the home but didn’t, the buyer might be able to get their deposit back. Or, if the seller misrepresented something about the property, the buyer might also be able to get their deposit back.
In general, though, if there’s no contingency and the buyer backs out, they won’t get their deposit back.
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