In Washington, What Happens to the Earnest Money at Closing?

May 31, 2024
Last updated:
May 31, 2024
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When buying a home in Washington, you might want to make an earnest money deposit to show your commitment to the deal.

While it’s not required, an earnest money deposit could help you get your offer accepted. Across the state of Washington, these deposits are customary, so sellers usually expect to see them. The question is, what happens to the earnest money at closing in WA State?

This guide explains what happens to earnest money at closing, and other scenarios that might arise.

What Is Earnest Money, Exactly?

True to its name, the earnest money (or “good faith”) deposit shows the seller that you are serious about the purchase and willing to invest in it from the outset. These deposits typically range from 1% to 3% of the purchase price, but that’s just a general guideline.

Earnest money at closing can compensate the home seller in the event that the buyer walks away from the deal and the seller has to re-list the property all over again. In this scenario, the deposit essentially makes up for lost time and effort on the seller’s part.

On the other hand, if the transaction proceeds and the buyer and seller reach the final closing process, the earnest money will be applied to the purchase price.

When buying a home in Washington, you need to understand all of the different scenarios that can occur when earnest money is being used. So let’s explore those scenarios.

Scenario #1: Buyer and Seller Reach the Closing Stage

Let’s start with the best-case scenario, which occurs when the transaction stays on track and reaches the final closing.

In this scenario, the home buyer’s earnest money deposit will be applied toward the down payment or closing costs. It can become part of your upfront investment or help cover your mortgage fees and other closing costs.

In Washington, this is the most common scenario for earnest money in Washington, and it’s what both parties want. Most home buyers who have their initial offers accepted ultimately reach the final closing stage, where their deposit money helps to facilitate the purchase.

But it doesn’t always work that way. Sometimes, a home buyer will exit or “back out” of a real estate transaction, and for a number of reasons. So let’s talk about those scenarios next.

Scenario #2: Home Buyer Backs Out of the Deal

In Washington, a home buyer who backs out of a deal before the closing could either lose or retain their earnest money—depending on the purchase agreement.

Some home buyers include contingencies within their contracts to protect their earnest money. A real estate contingency is a specific condition that must be met in order for the sale to be finalized. These conditions act as a kind of “safety net” for the buyer (and sometimes the seller).

For example, a home inspection contingency allows the home buyer to exit the deal and recover the earnest money if they’re not satisfied with the results of the inspection. But this has to be spelled out in the purchase agreement, which serves as a legally binding contract.

Note the difference between these two “back out” scenarios:

Backing out with contingency: This is where the specific conditions you set in the contract are not fulfilled, as in the home inspection example above. Or maybe the home appraises for less than the amount you need to borrow. If these real estate contingencies in Washington are written into the contract, you should be able to back out and recover your earnest money deposit.

Backing out without contingency: This is a trickier situation, from the home buyer’s perspective. If you exit the deal for a reason that’s not covered by a contract contingency, you risk losing your earnest money deposit. The seller may be entitled to keep it as compensation for taking the property off the market while the sale was pending.

How Disputes Are Handled in Washington

In some cases, unforeseen circumstances can arise that cause both buyer and seller to agree to cancel the sale. In this situation, you would likely get your earnest money deposit back.

But sometimes the buyer and seller will disagree about whether a contingency applies or not. In this case, a third-party mediator or even litigation might be necessary to resolve the issue and determine the fate of the earnest money deposit.

The courts consider “good faith” efforts by both parties. If extenuating circumstances beyond your control prevent the sale from closing (e.g., job loss, serious illness), a judge might rule in your favor, even if there’s no contingency.

Washington state law restricts the amount of liquidated damages (including earnest money) that a home seller can claim to 5% of the purchase price. This means that even if you lose your deposit, the seller can’t ask for more than that percentage.

According to the Snohomish County law firm Beresford Booth:

“Purchase and Sale Agreements frequently list the forfeiture of earnest money as the exclusive remedy in the event of a breach by the buyer.  In these cases, the damages for a buyer’s breach are essentially known beforehand, thus constituting a form of liquidated damages.  Additionally, per RCW 64.04.005(1), the earnest money to be forfeited may not exceed 5% of the total purchase price.”

If a home buyer and seller in Washington cannot resolve their earnest money dispute amongst themselves, the escrow agent holding the deposit will likely turn it over to the courts, so both sides can argue their claims.

But all of this represents the last resort—and a rare one at that. Nobody wants to go to court over the earnest money deposit or a home purchase agreement. Thankfully, this lost-resort scenario can usually be avoided.

Tips to Protect Your Earnest Money

Here are some steps you can take to protect your earnest money when buying a home in the state of Washington:

  • Work With an Agent: An experienced real estate agent can help you craft a strong purchase agreement with clear contingencies based on your needs.
  • Get Specific: Don’t just rely on standard contingencies. Consider adding protections specific to your situation. Examples include a financing contingency that gives you ample time to secure a loan, or a title contingency to address potential ownership issues.
  • Talk to an Attorney: While it’s not always necessary, a real estate attorney can explain the legal implications of various home buying contingencies and ensure your contract reflects your needs.
  • Open Communication: Maintain clear communication with the seller throughout the process. If you foresee challenges meeting a contingency, address them promptly.

To recap: what happens to the earnest money at closing in WA State will depend on, (a) whether or not you reach the closing stage, and (b) whether you include or omit certain contingencies. Our goal is to help you go into the process armed with the right knowledge.

Need help with the Washington home-buying process?

If you’re looking to buy a home in Washington, get started by teaming up with a local mortgage company. At Sammamish Mortgage, we’ve been helping buyers since 1992. Get in touch with us today to get an instant rate quote, get pre-approved for a mortgage, and begin your home buying journey.

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