What is Earnest Money?

March 31, 2017

Often times, the first question a buyer asks at our initial consultation is, “What is earnest money?” Earnest money is an essential part to the home sale process and lets the seller know you are committed.  It also ensures that the transaction continues moving along and the seller is compensated if the sale falls through by fault of the buyer.

Once an offer is accepted, the money you put down will go towards the down payment and closing costs if the deal closes as expected. If the deal falls through due to unforeseen defects in the home or due to fault of the seller, the earnest money will be refunded to the buyer and the contract will be terminated.

The amount of your earnest money deposit depends on a few factors, including the state of the real estate market, other offers on the home and what the seller may require to feel secure moving forward. Typically, you can expect to pay $1,000 in most transactions but it can go up to $5,000 or more. In a market where homes are not selling as quickly the seller may require less of a deposit where areas that homes are selling more quickly the seller may require more of a deposit.

You will give your earnest money deposit to your agent and sign the purchase agreement once the seller accepts the offer. You will also want to verify that the funds will be held in escrow. You will never give the deposit to the seller as it could be hard to get it back if anything goes wrong with the sale.  The funds will be held in escrow until the sale is almost complete and then they are released and applied to your down payment.

Always make sure your purchase agreement states how the refund is handled before writing your earnest money check to prevent any headaches in the event that your deal falls through.  It may be tough to stomach writing out a $1,000 check before your offer is even accepted but remember that is the first step towards owning your new home!