What exactly is earnest money? Will I get it back if something happens and we don’t close on the house?
This is a question that comes up a lot with first time home buyers in Iowa City. Earnest money is a very much misunderstood part of the purchase agreement. And actually it’s really quite straightforward. When you make an offer on a home you want the seller to know you mean business. The earnest money check is a show of good faith that you plan to buy the house and you’re not wasting the seller’s time.
The purchase agreement is structured in such a way that you as the buyer are protected in many ways when you buy a home in Iowa City. The one thing that is not covered is you changing your mind. You don’t get to have “Buyer’s Remorse.” If you do that, then the earnest money check gets disbursed to the seller.
Does that mean you must buy the house come what may? No it doesn’t. The purchase agreement typically contains a few contingencies that allow you to walk away from a deal in certain circumstances. Two typical contingencies in purchase agreements in Iowa City are for financing and inspections. If something happens and you are unable to obtain financing, then you will be able to cancel the contract and get your earnest money back. This of course only applies for the period of time before you release the financing contingency. The same applies to the contingency for inspections. If repairs come up at the inspections and buyer and seller are unable to come to an agreement on who will take care of them, then you as the buyer have the option to cancel the contract. And once again the earnest money will be returned to you. Just to make it perfectly clear. If you are unable to buy the house, because contingencies cannot be met, then you have the option to walk away – And your earnest money will be returned to you. This of course only applies if you put these contingencies into the contract. This is something you will discuss with your Realtor at the time of writing an offer. If you don’t put them in there it will be a lot harder to get your earnest money back if either of these scenarios comes up.
So that’s how it works for the typical scenarios when you’ve built contingencies into the contract. If something happens after these contingencies have been released it’s not as straightforward and it might not be as easy to get your earnest money back.
Now a little background info on how much and what exactly happens to the check. Here in Iowa City it’s typical to include an earnest money check for $500 with a purchase agreement for homes under or around $150,000. For mid range homes of around $200,000 earnest money is typically $1000. What happens is that the check is deposited into the trust account of the listing brokerage and that’s where it stays until closing where it shows up on the buyer’s side of the HUD1 Settlement Statement. Or to put it another way, you as the buyer get it back at closing and it is applied to the purchase price of the home.