You may find yourself in the situation where you need more money to cover all the expenses at your closing. You reach out to the seller and get them to agree to pay your closing costs, and that really helps. What happens to the earnest money deposit (EMD) if the seller pays closing costs?
- Earnest money may go towards the down payment
- You asked the seller to pay closing costs because you did not have an EMD
- Earnest money may be refundable if the closing costs and down payment are covered
Most of the time, if you get to closing and do not need to pay closing costs, the lawyers credit EMD against the down payment. In rare cases you may even get some or all the EMD back at closing.
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Does Earnest Money Go Towards Down Payment or Closing Costs?
Earnest money may go towards the down payment or the closing costs. They are not the same, and the EMD is never lost. It will help pay for something, or it will be refunded.
Closing Costs
Closing costs are the fees you pay for the professional services you use during the home buying process. These include:
- Lawyer’s fees
- Appraisal fees
- Title insurance
It can include many other things as well, depending on your case. Investopedia has an extensive list of possible fees that can go into these costs.
If you do not have enough money to cover the closing costs, asking the seller to pay them is a good idea because underwriting finds this more acceptable than other options. The seller does not really pay them. How it works is they add it to the sale price of the home, and it gets rolled into the mortgage. Then the seller gives back the extra cash for you to pay the closing costs. Therefore, you pay them, to pay you. It is a shell game in a way.
The banks like this because you do not get a gift from someone else. You simply borrow more money from them.
Down Payment
If you do not need the escrow money for the closing costs, you can put it towards the down payment. In most cases, this will be much higher than your EMD. For most people this is the largest single payment they ever make. Even if the seller pays you closing costs your EMD should only be a portion of the cash for closing you must bring.
What if I Do Not Have Earnest Money and the Is Earnest Money Refundable if the Seller Pays Closing Costs?
It is rare that the seller does not require EMD to execute the contract. However, it does happen sometimes. If this is the case for your deal, then you must produce all the cash to close from your personal savings.
Is Earnest Money Refundable if the Seller Pays Closing Costs?
Earnest money is refundable in two situations.
- If the deal dies because of a contract contingency
- If the deal closes and you cover all the cash to close from your savings
Most of the time if a deal dies it is because of a triggered clause. If this happens the money stays in escrow until both parties sign a release. Then the escrow agent writes you a check.
It is rare that you will get money back at closing if you are the buyer. It does happen for a few of reasons, though. Realtor.com tells us about one of them. if you secure a loan with no down payment, you may get some or all your EMD back.
Final Thoughts
What happens to earnest money if the seller pays closing costs? It frees up those funds to help with the down payment. If you do not need the EMD for that, then you will get a check back at closing.
Whatever the situation, you will not lose your EMD. In fact, the lawyers meticulously account for all the money that changes hands throughout the process.
