Is Earnest Money Refundable on New Construction?

You walk into the model home of a new community you’ve been eyeing, just to get an idea of what the builder offers. Nothing is wrong in just looking, right?! The possibilities of homeownership, upgrading, or perhaps downsizing, is such a refreshing and exciting thought. N-E-W, a fresh start! As you enter, you are met with the sales counselor, provided a folder full of information (that you know you’ll skim through later in the car) and are excited to tour around the amazingly decorated model home! Standing in the kitchen, you are amazed by the counter space. You’re smelling the fresh paint on the walls as you move into the primary suite and you can’t help but begin to imagine how exciting it would be to possibly come home to this one day.

You continue to walk around simply amazed and questions come to mind. The sales counselor starts to tell you about the builder, all the community has to offer, and you take a look at the plat map to see which lots are available. Perhaps the builder has an immediate move-in ready home (known as an Inventory home), and considering the timeline, you tour it. You’re in love. The wheels begin to turn. You want to get started with new construction!

When it comes to new construction homes, most builders have their own promulgated contract that you’d sign, that you are unable to edit or adjust at all, and they will have a few options for the buyer regarding lending!

The preferred lender (third-party)

An in-house lender (the builder owns the lending company)

Your own lender*

Now, the asterisk is because not all builders allow this. If they do, you, as the buyer, should be aware that you will also most likely lose any incentives the builder is offering. Say goodbye to those free appliances, closing cost credits, cash incentives off the home price, design center credits and not to mention, the earnest money amount might have increased.

Earnest money is a lot of money! It ranges from a minimal $500, to an average of $2,000, upwards of $10,000 depending upon the price of the home, the builder, etc. Some builders have a grace period that allows you, for any reason without penalty, to back out of the contract and get your earnest money back. However, this is pretty rare. Most builders don't offer this grace period at all.

If you were to request to cancel the contract, for any reason, your earnest money is most likely not going to be refunded. If, for some reason, you can't get fully approved through underwriting, your earnest money is most likely not going to be refunded. If you find a house you like better and want to back out, your earnest money is most likely not going to be refunded. If the home does not appraise and the lender cannot loan you the full contract price amount, and you are unable to make up the difference meaning you have to back out, your earnest money is most likely not going to be refunded. You’ve signed a legally binding contract with the builder.

Why is the builder keeping your earnest money? Because they’ve removed the home from the market for you to purchase and must recoup the damages. This could mean market re-evaluation, maybe the home isn't worth what it was when you contracted on it. Or listing photos, interest on the construction loan for the home, etc. The builder is a business, after all.

Now, there could be instances when the earnest money is refunded back to the buyer... It could be an anomaly with the construction of the home that simply can not be reverted (or maybe not desired to be reverted by the builder – yikes). Key word: Anomaly. Perhaps you had a contingency contract and couldn’t meet the terms by the deadline. It's possible, but entirely dependent on that promulgated contract I mentioned at the beginning. Reading through it and knowing your options is VITAL.

The easiest way to ensure you are protected through this process and fully understand your limitations and options? Hire a seasoned, new construction Realtor to help educate you on what different builders offer, to the contract terms, the lender process, recommend inspectors, etc. The sales counselor works for the builder. You deserve someone who is working and advocating FOR YOU during this pivotal moment of your life! So to answer the question... "Is earnest money refundable on new construction?" Probably not.

-Sara ter Heege