Earnest Money

Those of you who already purchased real estate before are most likely familiar with the term earnest money. First-time homebuyers however are trying hard to figure out the entire real estate transaction from start to finish.  This post is going to explain what is earnest money and why it is an important part of any real estate transaction.

What is Earnest Money?

Earnest money is the amount the buyer is willing to deposit to a seller once the parties reach mutual acceptance. This amount is a good faith amount showing the seller’s how serious they are about purchasing their home. The buyer’s need to make out a check in the amount they have mutually agreed upon in the purchase and sale agreement. This amount is then placed into an escrow account for the duration of the closing process. When the earnest money amount is more than $10,000, the money is put in an interest bearing account.

How much does earnest money have to be?

The amount of the earnest money varies from purchase to purchase. When a property is in high demand the more earnest money a buyer is wiling to put down the better chances they might have in reaching an agreement with the seller.During slow markets the earnest money deposits are usually lower than in time of “hot” markets. Buyer’s should always make a sound decision relying on  the guidance of their real estate agent. Normally the earnest money deposit is no more than 2-3% of the purchase price.

What happens to the earnest money?

If everything goes according to the purchase and sale agreement the earnest money amount is applied toward the buyer’s closing costs and down payment. If something goes wrong early in the transaction, the seller usually understands and the entire earnest money is refunded to the buyer. For example if the the parties cannot agree on the terms of the inspection and the deal falls through the money is released back to the buyer from the escrow company. There are instances, however where the buyer and the seller cannot come to an agreement. It is very important therefore for every agent to fully represent their clients to make sure that everything, including how the earnest money is handled is covered in the purchase and sale agreement.

If you have more questions about the earnest money or the entire process of a real estate transaction, do not hesitate to reach out. With over 20 years in the real estate industry I am confident that I can help you with any question you may have.