When you put in an offer for a house, you’re usually expected to put down a deposit into the escrow account that is set up for the transaction. This is called “earnest money”. This money will generally be due at the time that the offer is accepted and the sales & purchase agreement signed. If the purchase agreement is breached, you lose the earnest money. You'll often have help from your escrow company to manage the transaction, but we’ll give you the answers you need to understand how to approach structuring and securing the deposit.
In your offer letter, you have the ability to specify how much your earnest money will be. The deposit amount will usually be 1% - 3% of the purchase price. You'll generally have an escrow account opened by your title/escrow company around this time, and this is where you can deposit the earnest money. This usually needs to happen within a few days of signing the purchase agreement.
Be safe when depositing into your escrow account, as there are known escrow deposit scams. Call the escrow officer and verify the wiring instructions before executing the transaction, and make sure you're workng with a trusted party.
Yes, but generally only if a contingency, which you should have specified when putting in your offer, is triggered (more on contingencies here). A few examples of scenarios where a contingency enables an earnest money deposit refund:
Each of these contingencies has a due date, which means you have to release these contingencies by the specified date. If the contingency is released and an issue comes up after the fact, you won't be able to use the contingency to back out of your contract while getting your earnest money back.
If you have passed the deadlines for releasing a contingency, the seller can start taking action to coerce you into completing the purchase, or forfeit the earnest money. In some rare cases it is also possible for a seller to sue you if you back out for an invalid reason, and coerce you into completing the purchase.
Your contingencies are there to protect you, so don’t waive them too early, and beware the risk you are taking on if you forgo a contingency in your offer to make it more appealing. Make sure to do your due diligence during the contingency period and don’t release them until you are absolutely certain, and you’ll be protecting your interests.
The earnest money goes towards the cash you are putting down on the property. At closing, your remaining payment into the escrow account will be all the closing costs and downpayment minus the earnest money you have already paid.
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You’ve put in an offer on a house and you’re supposed to put up a big deposit in escrow? What’s that for? We can answer all your questions about earnest money so you’re in control of your deposit.