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When Can a Seller Keep Your Earnest Money Deposit?


If you're like many people, you know that when you offer to buy a home, you usually include an earnest money deposit. But when does a seller get to keep it? This guide explains.

When Can a Seller Keep Your Earnest Money Deposit?

To understand when a seller gets to keep an earnest money deposit, you must first understand what an earnest money deposit is for. An earnest money deposit is cash that you give a seller to show that you're serious about making the purchase. After all, you're asking the seller to take their home off the market so you can buy it, but the seller doesn't have any guarantee that the transaction will actually go through.

Usually, an earnest money deposit totals between 1 and 3 percent of the homes purchase price.

The reason this deposit exists is so that the seller has some form of compensation if you back out of the transaction without a good enough reason to do so.

So what is a good enough reason? That's where contingencies come in.

What You Need to Know About Contingencies

Contingencies are conditions that must be met before a transaction can go through. Contingencies affect buyers and sellers. Some of the most common contingencies involve home appraisals, inspections and financing. The following sections explain.

Related: 5 tips to help you buy the perfect home

Appraisal Contingency

An appraisal contingency says that if your lender doesn't believe that the home is worth what the seller wants you to pay for it, you don't have to make the purchase. Here's the deal with appraisals: lenders send appraisers to properties to determine how much they're worth. Lenders won't allow people to borrow more money than a home is worth to make a purchase, because statistically, those homes are more likely to go into default (that is, the homeowner stops making the payments).

If a home appraises low, you have a few options. You can ask the seller to lower their purchase price or you can come up with the additional money on your own. Alternatively, you can walk away from the transaction with your earnest money in your pocket.

Related: 7 essential tips for first-time homebuyers

Inspection Contingency

When you offer to purchase a home, you're a real estate agent will build an inspection contingency into your contract. That contingency gives you the right to hire a home inspector and, if the inspector turns up something you just can't live with and the seller won't fix, the right to cancel the deal.

Usually, buyers use inspection reports to negotiate with sellers. For example, if an inspection report says that the flooring was improperly installed, the buyer can ask the seller to reinstall it, give them a credit, or even lower the asking price for the home. However, if the seller isn't willing to do any of those things, the buyer gets their earnest money deposit back and starts looking for a different home.

Financing Contingency

The financing contingency is an important one. It says that if you, after a good faith effort, are unable to secure financing to purchase a home, you're off the hook. You don't have to buy it. This contingency also says that if you're unable to get financing, you get your earnest money deposit back.

Related: How to use a VA loan to buy a home

Can a Seller Keep Your Earnest Money if You Get Cold Feet?

Cold feet aren't covered in real estate purchase contracts, so you cant back out of the deal and expect to keep your deposit money. Remember, this causes the seller a lot of work and it may have caused them to miss out on other buyers.

There are many other reasons a seller can keep your earnest money deposit, too not just cold feet on your end. If you decide to back out of the transaction for a reason that isnt outlined as a contingency in your contract, the seller is entitled to keep the money. They can do whatever they like with the money. It's a form of compensation for taking their home off the market for someone who promised to buy it but backed out of the deal.

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