Yes. The due diligence fee does go toward closing: it is credited to you as a partial prepayment of the purchase price, so the balance you owe at the settlement table drops by the exact amount you already paid the seller. It is not an extra charge stacked on top of the sale price.
How the Credit Works at Closing
In states that use this fee, the standard residential contract provides that the amount “shall be a credit to Buyer at Closing.” The settlement agent subtracts what you paid the seller from the total purchase price, so you are not paying it twice.
Say the purchase price is $400,000 and you paid a $2,000 due diligence fee when the contract went effective. At closing, the remaining balance drops to $398,000. Your down payment, loan proceeds, and any other deposits cover that reduced figure. The credit applies at whatever amount you paid. Five hundred dollars or five thousand, the full sum comes off what you owe.
The settlement agent or closing attorney is responsible for reflecting the credit accurately in the final accounting. Because the contract requires it, failing to apply the credit would be a breach of the agreement. Before you sign anything at the closing table, confirm that the credited figure matches the exact dollar amount you originally transferred to the seller.
Where to Find the Credit on Your Closing Disclosure
If you are financing the purchase, your lender must give you a Closing Disclosure at least three business days before the scheduled closing date.1Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs The form is required under the TILA-RESPA Integrated Disclosure rule and replaces the older HUD-1 settlement statement for most mortgage transactions.2National Credit Union Administration. Truth in Lending Act (Regulation Z)
Your due diligence fee appears on Page 3 of the Closing Disclosure, inside the Summaries of Transactions table. Federal regulations require that any amount paid to the seller or held in trust under the sale agreement be listed under the subheading “Paid Already by or on Behalf of Borrower at Closing,” labeled as a “Deposit.”3eCFR. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions Compare the number on that line against your original payment receipt, whether you wired the fee or sent a cashier’s check. If the amounts do not match, raise the discrepancy with your settlement agent before the three-day review window closes.
Cash Purchases Without a Mortgage
The Closing Disclosure is only required for transactions involving a mortgage loan. If you are buying with cash, the TILA-RESPA Integrated Disclosure rule does not apply.2National Credit Union Administration. Truth in Lending Act (Regulation Z) The settlement agent uses a different settlement statement instead. Some jurisdictions still use a version of the HUD-1, others use state-specific forms or the settlement agent’s own template.
The credit works the same way contractually no matter which form appears at the table. The settlement statement should show the due diligence fee as a credit to you, reducing the balance due. Ask your closing attorney or title company which document they will prepare, and review it before closing day to confirm the credit is on it.
How It Combines With Earnest Money
Most buyers in states that use due diligence fees also pay a separate earnest money deposit. The two payments serve different purposes and sit with different parties. The due diligence fee goes directly to the seller at contract signing. Earnest money is typically held in a trust or escrow account managed by a brokerage, attorney, or title company until closing. Both amounts are credited toward the purchase price at settlement.
The settlement agent adds the two deposits together and subtracts the combined total from the purchase price. If you paid $3,000 in due diligence and $5,000 in earnest money, you receive an $8,000 credit at closing. Your cash-to-close figure, the amount you need to wire to the escrow account on closing day, reflects the combined reduction. Both should appear as separate line items in the Summaries of Transactions table on your Closing Disclosure.
When You Don’t Get the Credit
The credit only exists if the deal actually closes. The due diligence fee is non-refundable the moment the contract takes effect, and the seller keeps it regardless of whether you go through with the purchase.
If you walk away during the due diligence period for any reason, you lose the fee but can recover your earnest money deposit. That distinction matters. During the investigation window, the due diligence fee is the price of your flexibility, while earnest money stays protected.
After the due diligence period expires, the stakes rise. Backing out at that point typically means forfeiting both the due diligence fee and the earnest money. The seller may also have the right to pursue additional damages for breach of contract, depending on the terms of your agreement.
Exceptions That Allow a Refund
A few contract-based exceptions can trigger a full refund of the fee:
- Seller breach: If the seller fails to meet a material obligation, such as delivering clear title or making agreed-upon repairs, you can typically terminate and recover the fee along with your earnest money.
- Property damage or destruction: If the home is significantly damaged or destroyed before closing (for example, by a fire or natural disaster), most standard contracts give you the right to cancel and receive a full refund of both the due diligence fee and earnest money.
- Contract addendum: Some addenda, such as those covering contingent sales, include their own refund provisions. If the seller terminates under the terms of an addendum during the due diligence period, the fee may be refundable.
Whether damage rises to the level that triggers a refund right usually requires a judgment call. In disputed situations, an insurance provider or attorney may need to weigh in. Read your contract and any attached addenda carefully so you know which protections apply.
What the Credit Means for Your Cost Basis
Because the fee is credited toward the purchase price, it becomes part of your total cost for the property. The IRS treats the cost of buying a home, including settlement fees and closing costs related to the purchase, as part of your cost basis.4Internal Revenue Service. Basis of Assets Your basis matters when you eventually sell, because it determines how much of your profit is subject to capital gains tax.
The due diligence fee is not separately deductible in the year you pay it. It is folded into the purchase price through the closing credit, which means your basis reflects the full agreed-upon price. If the deal falls through and you forfeit the fee, talk to a tax professional about whether the loss is deductible. The answer depends on your specific circumstances and how the IRS treats the payment in the context of an uncompleted transaction.