What Happens to Earnest Money When Making an Offer?

What happens to Earnest Money when I make an offer? Will  I get my money back if I  don’t buy the house?

These two questions are the most common questions I get asked when buyers are ready to make an offer on a home in Iowa City. Writing the check is never the issue. It makes perfect sense to buyers that writing a check as a deposit on the home is a gesture of goodwill and shows they are serious, (earnest), about buying the house. What is worrisome is not knowing what will happen with that check once they hand it over to me. And if they’ll get it back if the transaction fails and they don’t buy the house.

What Happens to Earnest Money?

Earnest money in Iowa is typically deposited into the Listing Broker’s trust account when buyers and sellers have agreed on price and terms of a house and have both signed the purchase agreement. This is called an accepted offer. This is the point in the transaction when the buyer’s agent will give the check to the listing brokerage and it will be deposited into their trust account. That’s where it stays until closing, when it shows up on the Closing Disclosure on the buyers side of the transaction.

Although the earnest money check is a gesture of goodwill to the sellers, they don’t actually get that check and never see it. The earnest money check is simply returned to the buyers at closing and applied to the sales price.

Getting Earnest Money Back

Will you get your earnest money back if you don’t buy the house? That will depend on what was included in the purchase agreement. The purchase agreement is a contract and will typically include contingencies that need to be met before a buyer will move forward with the real estate transaction. A contingency is a condition under which the buyer is making the offer. What that means is, if those conditions aren’t met, a buyer can back out of the deal and get their earnest money back. Typical contingencies, (or conditions), are Financing and Inspections. (There are other contingencies buyers can and should add to the contract if they are important to them. Financing and inspections are the two most common contingencies).

This is why it’s important to pay special attention to what exactly is included in the purchase agreement. As long as buyers have contingencies in place they will typically get their earnest money back. Remember. The purchase agreement is a contract to buy a house and is binding. If you make an offer and don’t include any contingencies, it won’t be as easy to get the earnest money back. Buyers do need to have a legitimate reason for backing out of the contract to get their earnest money back.