What is The "Earnest Money" Deposit?
The earnest money deposit is a "show of good faith" that underscores the buyer's seriousness of purpose and gives confidence to the seller to be able to take the property off the market during the "due diligence" or escrow period (from contract to closing, usually 30-45 days).
The buyer's earnest money check is not deposited in an escrow account until there is a signed and accepted (i.e. "ratified") contract, and will be governed by state law handling of escrow accounts.
When we represent buyer clients, we usually include 6 contingencies that our clients can use to release a contract "with cause" and get their earnest money deposit refunded in full:
- Home Inspection contingency - if the home inspection reveals defects or issues that are larger than the buyers expected
- Termite/Fungus Infestation (CL-100) contingency - if the property shows active termite infestation or termite/wood fungus damage, and the sellers are not willing to repair the damage and treat the property and/or place it under termite bond at their expense
- Loan approval contingency - if the bank does not approve the buyers' loan at the terms they expected
- Appraisal contingency - if the appraised value comes in below the purchase price and the sellers refuse to lower the price
- Insurance contingency - if the buyers are unable to obtain insurance coverage at a reasonable cost
- Marketable Title contingency - if the closing attorney finds out there is a lien against the property or a judgment against the sellers that they are not able/don't want to remove before the closing
The buyers would lose their earnest money deposit if they don't perform on the contract "without cause" (for example if they just change their mind after all the contingencies have been satisfied).
If the transaction is completed successfully (i.e. "closed") your earnest money deposit is credited to you and becomes part of the buyers' downpayment (if no downpayment was required and the seller is paying for all the closing costs and prepaid expense, then the buyers' earnest money may be returned to them at closing).