Buying a Home: Basics About Earnest Money

 

On your real-estate journey, you’ve probably heard the term “earnest money.” And maybe it sounded a little odd. But it’s really a very easy and sensible concept.

 

What is earnest money in a real estate transaction?

Earnest money, sometimes called “good faith money,” is a way to let the seller know that you’re serious about buying their home. You could think of it as “in earnest money.” Simply put, when you make an offer, you put money down to demonstrate your sincerity. Then if your offer is accepted, that money is held in escrow until you close.

 

How much earnest money do buyers need to put down?

In our market, earnest money is about 5-10% of the sale price, with $1,000-$5,000 due at offer signing, and the remainder due when the Purchase and Sale (P&S) is signed.

Sometimes, a really motivated buyer might offer to put even more into escrow to prove their strong wish to purchase. In that case, earnest money could also be one more tool to help your offer stand out from the crowd—a conversation to have with your real estate agent.

 

Does the seller ever get to keep my earnest money?

Not in most cases. But if things go wrong, occasionally they do. And sometimes, that’s only fair to them. Remember, when the seller enters into a purchase agreement, their home comes off the market. They receive no more offers and give no more showings (which, by the way, benefits the buyer.)

So under certain circumstances (see below), the seller might receive the earnest money, which can help them defray the cost of relisting, re-showing, etc.

 

So what happens to my earnest money deposit if something goes wrong?

If you go through the process and things don’t work out, you may get your earnest money/deposit back. Maybe the home inspection reveals too many defects or repair items and you decide not to proceed. If your offer included a home inspection contingency, as long as you inform the seller by that contingency date, the earnest money comes back to you. Or perhaps you are not able to secure your mortgage by your financing contingency date. Again, as long as you adhere to the contingency dates included in your offer, you are entitled to a return of your earnest money.

But in a different example, if after signing the offer and putting down earnest money of $1,000-$5,000, a buyer changes their mind and decides to walk away from the transaction for no other reason, then the seller might be entitled to keep that deposit/earnest money.

Again, this is a good conversation to have with your agent.

 

Does earnest money have anything to do with my down payment?

Although earnest money is part of the contract between the buyer and seller, the dollar amount is considered part of your total down payment. So, for example, if your total down payment is 20% of the purchase price and your earnest money deposit is 5%, your remaining down payment at closing will be 15%. We are simplifying things here, and it’s always important to discuss your specific circumstances with your agent.

 

What happens to my earnest money when we close?

Typically, your earnest money goes towards the purchase price of the home. Throughout the transaction your earnest money is held in an escrow account by the listing real estate firm. At closing, that money is considered as part of your total payment for the property.

 

What if I have more questions about earnest money?

We’re here to answer them. Our knowledgeable real estate team can guide you every step of the way, from the sometimes-confusing thicket of real estate terms, to closing on your dream home.