Earnest Money Explained

What is Earnest Money?

Earnest money also known as good faith is something of value you give to the seller after a contract is accepted to confirm the contract.

What is earnest money for?

Earnest money is used as leverage for the seller to hold a buyer to the contract.  Earnest money is tied to the sale of the purchase and the seller can keep the earnest money if a buyer gets cold feet and decides not purchase.

How much earnest money do you have to put down?

You have to put down something of value. It can be a $1.00 or even a piece of jewelry. The sellers gets to decide if the amount is sufficient.  The typical rule of thumb is 1% of the purchase price.  Home buyers may put down more if they are competing with other buyers and they want their offer to stand out.

When is earnest money due?

When earnest money is due depends on your contract.  Typically it needs to be deposited within 2 days of mutual acceptance of a contract.

Where does the earnest money go?

The real estate contract should state who holds the earnest money.  Typically it's the escrow office handling the sale.  When the property closes the earnest money will go towards your closing cost or the down payment. In the event that a buyers doesn't have closing costs or a down payment then the earnest money would be refunded back to the buyer.

Where does the earnest money go if the sale doesn't go through?

If the buyers have contingencies then they will be tied to the earnest money. For an example the buyers might have an inspection contingency.  The buyers complete their inspection and find out that the home needs a new foundation and they no longer want the home.  They could get out of their contract and receive the earnest money back as long as they respond back before the contingency expires. If the buyers get cold and just want out of their contract and don't cancel based on one of the contingencies then the seller can keep the earnest money.