When Can Sellers Keep Earnest Money?

When a buyer makes an offer on your home for sale, they will most likely include an earnest money deposit. This is a percentage of the purchase price – usually between one and three percent – that signals the buyer is making an offer in good faith. But what happens if the deal ultimately falls through? Does the seller get to keep the earnest money? Or should it be returned to the buyer? Let’s take a closer look at when the seller is legally allowed to keep an earnest money deposit if the sale doesn’t close.

First, understand the logistics

As a seller, there are different ways that you can handle the earnest money deposit. You should know who is holding the deposit, whether it is your agent, an escrow company, or a bank. The purchase contract will state specifically where the earnest money will be held. That money is then typically applied to the down payment at closing. Sellers can help to protect themselves by requiring that the earnest money check be cashed before being put in escrow. This helps to ensure that if the deal does fall through for reasons other than what is stated in the purchase contract that the seller can keep the money before the check is canceled.

Second, know the contingencies

During the pandemic, many buyers were making offers on homes with no contingencies. While this can be bad news for the buyers, for sellers it made things much easier. But the housing market has shifted and more buyers are making offers with contingencies. These are agreements between the buyer and seller that allow the buyer to back out of a sale. They can include:

  • Inspection contingency – If a home inspection uncovers problems that were not previously disclosed by the seller, then the buyer can back out of the deal with no penalties.
  • Financing contingency – If the buyer does not ultimately qualify for a mortgage, then they will not be penalized if the deal falls through.
  • Appraisal contingency – If the home appraises for less than the offered amount, then the buyer can walk away from the deal with no penalties.

Sellers must understand what contingencies they are agreeing to so that they know when an earnest money deposit needs to be returned to the buyer by law.

When sellers can legally keep the earnest money deposit

Now that you understand when the earnest money deposit needs to be returned to the buyer, let’s take a look at situations where the seller can keep the money. First, if contract deadlines are not followed, then sellers can keep the earnest money. That means if the home inspection isn’t conducted or a mortgage isn’t secured by a certain date and the buyer hasn’t made attempts to get permission in writing for an extension, then the seller can keep the money. Secondly, sellers can also keep the money if the buyer backs out for any reason other than what is stated in the contract. If your buyer walks away without giving a reason, then you are entitled to keep the earnest money. Ultimately, it all boils down to what is stated in the contract. If the buyer did not adhere to the terms, then the seller is legally entitled to keep that money.

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