What happens to earnest money if appraisal is low?
When a home appraisal comes in lower than the agreed-upon sale price, it can affect the amount of earnest money involved in the transaction. Earnest money is a good faith deposit made by the buyer to show their commitment to purchasing the property. In the event of a low appraisal, the fate of this money will depend on the terms outlined in the purchase agreement between the buyer and seller.
If the appraisal is low, and the buyer and seller are unable to reach an agreement to adjust the sale price, one common outcome is for the buyer to back out of the deal. In this case, the buyer may be able to get their earnest money back, provided the purchase agreement includes an appraisal contingency clause that allows for this scenario. The earnest money is typically held in escrow until the completion of the transaction, which gives both parties time to settle any disputes that may arise.
However, if the purchase agreement does not include an appraisal contingency clause, the buyer may risk losing their earnest money if they decide to walk away from the deal due to a low appraisal. The seller may argue that the buyer failed to fulfill their contractual obligations by not proceeding with the sale, and therefore, the seller is entitled to keep the earnest money as compensation for the lost time and opportunity.
In cases where the buyer wants to move forward with the purchase despite the low appraisal, they may have a few options. They can try to negotiate with the seller to lower the sale price to match the appraised value or come up with the difference in cash. If the seller agrees to adjust the price, the earnest money will typically be applied towards the final purchase price. However, if the buyer cannot secure additional financing or the seller refuses to lower the price, the buyer may have to walk away from the deal and risk losing their earnest money.
Overall, the fate of the earnest money in a low appraisal situation comes down to the specific terms outlined in the purchase agreement and the willingness of both parties to negotiate and compromise.
FAQs:
1. Can a buyer get their earnest money back if the appraisal is low?
In some cases, yes. If the purchase agreement includes an appraisal contingency clause and the parties cannot come to a resolution, the buyer may be able to get their earnest money back.
2. What is an appraisal contingency clause?
An appraisal contingency clause is a provision in a purchase agreement that allows the buyer to back out of the deal if the property appraises for less than the sale price.
3. How much earnest money is typically involved in a real estate transaction?
The amount of earnest money can vary but is usually around 1-3% of the purchase price.
4. Who holds the earnest money during a real estate transaction?
Earnest money is typically held in escrow by a third-party, such as a title company or real estate attorney.
5. Can a seller keep the earnest money if the buyer backs out due to a low appraisal?
It depends on the terms outlined in the purchase agreement. If there is no appraisal contingency clause, the seller may be entitled to keep the earnest money.
6. What happens if the buyer wants to proceed with the purchase despite a low appraisal?
The buyer can try to negotiate with the seller to lower the sale price or come up with the difference in cash.
7. Can the seller dispute the low appraisal?
Yes, the seller can dispute the appraisal and request a second opinion from another appraiser.
8. Can earnest money be used towards the down payment?
Yes, in some cases, the earnest money can be applied towards the down payment or closing costs.
9. How long is earnest money typically held in escrow?
Earnest money is usually held in escrow until the completion of the transaction, which can range from a few weeks to a few months.
10. Can the buyer lose their earnest money for reasons other than a low appraisal?
Yes, if the buyer fails to comply with the terms outlined in the purchase agreement, such as missing deadlines or backing out for reasons not covered by contingencies.
11. Can earnest money be refunded if the seller breaches the contract?
If the seller breaches the contract, the buyer may be entitled to a refund of their earnest money.
12. Can the buyer take legal action to try to get their earnest money back?
Yes, the buyer can seek legal recourse if they believe they are entitled to a refund of their earnest money due to a low appraisal or other reasons outlined in the purchase agreement.