Earnest Money --> Down Payment

4 Replies

All,

I would like some clarification on earnest money. Being told that our earnest money will go towards our down payment and held in escrow until the P&S is signed. I've heard that MOST of the time you get your earnest money back if you back out of a deal. I am having trouble understanding when those few situations that you do not get your earnest money back.

Thank you

@Anthony Simboli

One of the most common situations when you don't get your EM back is after you've signed off on all your contingencies (releasing them), and then don't close.  The common contingencies are inspection and financing.  When the dates hit for those, you sign a release.  If you release the financing contingency, for example, and then something falls through with your financing at the last minute and you can't close, then you would lose your EM.

Hope that clarifies it.

- Tom

Your earnest money is your skin in the game when you make an offer. And I'd say there are actually very limited circumstances when you should expect to get your earnest money back, and these are only what is outlined in your offer/contract in the form of a contingency.

The two most common contingencies are:

1. Inspection Period - I want 15 days (or whatever amount of time you negotiate) to thoroughly inspect the property. If I find anything wrong with it or any surprises (or my repair estimates come back too high), I can back out of the contract and not lose my earnest money. There are very legitimate reasons to ask for an inspection period (for example, maybe the utilities are turned off and you are unable to inspect plumbing, electrical, or HVAC without them being on).

2. Financing - if I am unavailable to get financing at acceptable terms within a certain time period, I can back out of the contract and not lose my earnest money (This is whay a strong pre-approval letter is important in financed offers).

There are other contingencies that are less common, but still used occasionally such as an appraisal contingency (if the house doesn't appraise, I can back out and keep my earnest money) and sale of another property (I'm offering to buy your house, but I have to sell mine first).

If you google "real estate contract contingencies", I'm sure you can find many more.

Bottom line - you should not be making offers under the assumption that "MOST of the time you get your earnest money back if you back out of a deal". 

Know what contingencies are in your contract, and use them wisely and sparingly. The fewer contingencies, the stronger the offer, and vice versa.

Thanks @Tom S. makes sense. So here is why I ask. We are about to put an offer on a house that we have not seen in person yet, but are making it contingent on the following: Mortgage Contingency, Inspection Contingency, and a contingency on my partner and I viewing the property in person. So if we put down our earnest money and the inspection comes back perfectly fine, and my partner and I do not like the property, we can back out but will we get our earnest money back.

Appreciate the help!

@Jeff Copeland thank you for your input. I did not mention that my partner and I will never put an offer in without mortgage, and inspection contingency. So although I do understand what you are saying, our earnest money is going to the broker NOT the seller. Our money will be held in escrow. Thanks

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