An earnest money agreement is typically voided or forfeited when a buyer breaches the contract by failing to meet deadlines, such as inspection or financing contingencies, or by backing out for reasons not allowed by the agreement. Other reasons include failure to pay the deposit on time, or the seller canceling due to unfulfilled contractual obligations.
Buyers lose earnest money when they fail to perform on a contract and they're out of contingencies to exit the contract without penalty. This boils down to a buyer changing their mind after all contingencies are closed, so the earnest money goes to the seller to compensate for having their home off the market.
Here are a few common scenarios when a buyer can usually expect to get their earnest money refunded:
This typically happens when a buyer backs out of a transaction for reasons not protected by contingencies in the purchase agreement. Common scenarios where earnest money might be lost include: Missing deadlines specified in the contract. Backing out of the purchase without a valid contingency.
In general, buyers can expect to put down 1% to 3% of the home's purchase price as earnest money. For example: On a $400,000 home, a typical earnest money deposit might range from $4,000 to $12,000.
One of the main causes of earnest money disputes is a buyer changing their mind about the purchase. If a buyer changes their mind, they may try to get their earnest money back. However, the seller may argue that the buyer is not entitled to a refund.
If you back out of the contract for an approved contingency, you will get your earnest money back. You can expect your earnest money back if: The home doesn't pass inspection. The home appraises below its sale price.
3x Your Annual Gross Income for Home Price
The total purchase price of your home should not exceed three times your annual gross income. This helps prevent taking on absolute debt that can strain your financial life.
Unfortunately, sometimes sellers refuse to return the earnest money. The buyer may need to have their attorney send a formal request to cancel the transaction and return the earnest money. If the seller still refuses to release the funds, then the buyer may need to consider legal action.
The worst time to sell a house typically falls between late fall and early winter, specifically November through January. Market data consistently shows these months have the lowest seller premiums, with October hitting just 8.8 percent above market value compared to May's 13.1 percent premium.
Most lenders require the property to be owned for at least six months before they will accept applications, regardless of your financial circumstances or credit history. The timing calculation for the six month mortgage rule begins from the HM Land Registry registration date, not the completion date.
As a buyer, you can back out of the deal at closing and even after signing the contract, but you will lose money. Sellers also face consequences for backing out of the contract. If a seller backs out, the buyer could sue for breach of contract, and the seller may also be forced to return the buyer's earnest money.
What Happens If My Buyer Pulls Out of A House Sale?
These include: Inspection contingency (typically 17 days): Allows you to cancel if issues are discovered. Appraisal contingency (typically 17 days): Lets you cancel if the home doesn't appraise at the purchase price. Loan contingency (typically 21 days): Protects you if you're unable to secure financing.
Breach of Contract Lawsuit: If all attempts at resolution fail, the buyer may choose to file a breach of contract lawsuit seeking damages, including the return of the earnest money deposit.
Generally, deposits are refundable unless there is a clear and agreed contract term stating they are non-refundable.
For buyers, the best dispute reason is arguably fraud or unauthorized activity. Cardholders who can produce compelling evidence showing that they did not approve a transaction are more likely to win a dispute than if it was initiated for another reason.
The Causes of Conflict