What happens to earnest money when buyer backs out

You could be at risk of losing that deposit under some circumstances.

When you make an offer to buy a home, you will have to put down a deposit. This deposit, which is often referred to as "earnest money," shows the seller that you are serious about following through with the offer you make.

An escrow agency -- a trusted independent third-party agency, such as a title company or law firm -- will hold the earnest money deposit. Usually, the third party that will ultimately handle the closing of the real estate transaction is the one you'll make the deposit with.

Your offer will specify how much time you have to put down the deposit once the seller accepts your terms. And you'll need to fulfill that requirement to move forward with the sale. But what happens to that deposit if you decide not to purchase the house after all? It depends on the circumstances.

What happens to your earnest money deposit if you don't purchase a home?

If you decide not to follow through with purchasing a home, you could potentially get your earnest money back -- or you could potentially lose the entire deposit that you made. The consequences of your decision will depend on the specifics of your offer and the reason that you are backing out of the sale.

In most cases, when you make an offer, it will be contingent upon, or conditioned on, specific things happening. For example, buyers usually include the following contingencies:

• Inspection
• Appraisal
• Financing

The inspection contingency gives a home buyer the right to have a professional inspection of the home performed. If it turns up problems, the buyer can walk away from the sale. The appraisal contingency gives a buyer the right to back out of the home sale if the house doesn't appraise for as much (or more) as they offered to pay for it. And the financing contingency gives the buyer a right walk away if they aren't able to get approved for a mortgage loan.

If these contingencies are included in your sales contract and you decide not to go through with the sale for any of those reasons, then you should be able to back out of a home purchase agreement. That would mean you would get your earnest money deposit back.

For example, if you had 10 days to have an inspection performed and you fulfilled this requirement and discovered serious problems, you could notify the seller, rescind your offer, and get your money back.

But, if all of the contingencies are fulfilled or the time limit passes for satisfying them and you haven't notified the seller that you want to cancel the contract, then you will most likely not be able to walk away from the contract without justification.

If you fail to fulfill your end of the bargain and decide not to go through with the sale for some other reason, or just because you changed your mind, then you would typically forfeit your earnest money deposit. That's because you'd be in breach of your agreement in the sales contract. That means you aren't entitled to get back that earnest money you had put down to show you were acting in good faith.

Obviously, you don't want to lose your deposit. So before you make an offer to buy a home, be sure that you:

• Read the contract carefully
• Include any contingencies that you feel are important
• Have solid plans to go ahead with the home purchase

It's the right thing to do for the seller and for you.

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