When you make an offer to buy a home in Scottsdale or elsewhere, it’s customary to put down an earnest money deposit. This money, sometimes called a good faith deposit, is your way of showing a seller that you’re serious about purchasing their home. Unless the transaction falls through, your earnest money deposit will most likely be applied to your down payment or closing costs on closing day. However, in some cases where the transaction falls through, sellers are allowed to keep a prospective buyer’s earnest money deposit. Here’s what you need to know.
Could a Seller Keep Your Earnest Money Deposit if You Decide Not to Buy a Home?
Usually, sellers aren’t entitled to keep a buyer’s earnest money deposit. However, in rare cases, sellers do get to hang on to that cash.
Look at it this way: Your earnest money deposit is a way of showing the seller that you’re serious about making the purchase. As a result of you making that deposit, the seller takes their home off the market. It’s unavailable for anyone else to buy because the seller has agreed to sell it to you.
But if your transaction falls through, the seller has to start from scratch. They must list their home all over again, find a new buyer, and deal with all the paperwork involved in accepting an offer.
If the transaction falls through due to no fault of your own, or if you’re covered by a contingency in your purchase contract (more on those in the following sections), you get your earnest money deposit back. However, if you back out of the deal because you get cold feet – or if you cancel the transaction without a contingency in place to protect your earnest money deposit – the seller may be entitled to keep your deposit.
What Do Contingencies Have to Do With It?
Contingencies are conditions that must be met in order for a real estate transaction to go through. Your real estate agent will build contingencies into your contract that protects you. The most common contingencies involve:
- Home inspection
- Home Appraisal
Here’s a closer look at each.
The Financing Contingency
A financing contingency says that if you can’t secure financing to purchase the home, you’re off the hook. Naturally, you need to make a good faith effort to secure financing – but if it doesn’t work out, the seller isn’t going to force you to purchase the home with the money you don’t have. If you can’t get financing and this contingency is built into your contract, you get to exit the deal while keeping your earnest money deposit.
The Home Inspection Contingency
A home inspection contingency gives you the right to have the home inspected by a professional, as well as to back out of the deal if the inspection turns up something you can’t negotiate with the seller. For example, if your inspector discovers that the home has a leaky roof, you have the option of asking the seller to lower the purchase price, fix the roof, or give you a credit so that you can hire a professional to fix it after you make the purchase. You also have the option of walking away from the deal. If the seller is unwilling to negotiate, you may keep your earnest money deposit; the seller has to return it to you.
The Home Appraisal Contingency
Your lender will require a home appraisal. Usually, the buyer pays for this appraisal, though they don’t get to choose the appraiser. Lenders require appraisals so they can be sure they’re not giving people more money than a home is worth. If the home you want to buy appraises low, you don’t have to buy it. In fact, doing so would likely require you to come out of pocket; your lender probably won’t give you a dime over appraised value. In a case like this, You should get your earnest money deposit back.