It seems that we spend most of our lives trying to prove our trustworthiness to others, and it is no different in the real estate world, especially when working out a deal for someone’s home. Among the plethora of terms and procedures, you’ll come across when completing a real estate transaction, earnest money stands out as a sign of intent, a measure of security, and, often, a source of confusion for many first-time homebuyers and sellers. We want to help you better understand what earnest money is and how it applies to you and your future real estate transactions. Check out our earnest money breakdown below.

What is Earnest Money?

In the context of real estate, “earnest money” refers to a deposit made by the buyer when making an offer on a property. It is a good faith payment showing the seller that the buyer is trustworthy and serious about purchasing their property. Unlike a down payment, which is a larger sum paid at closing, the earnest money is a part of the initial offer and signals a buyer’s commitment to the deal. Sellers often take their property off the market once they accept an offer. If the buyer backs out without a serious cause, their earnest money provides the seller with financial compensation for the lost time.

Shows Commitment

When a buyer includes earnest money with their offer, it shows they are willing to put a portion of their assets on the deal. This commitment often influences the seller’s view of the buyer’s sincerity and the strength of the offer.

Protects Both Parties

Earnest money acts as a form of legal protection for both parties. It discourages the buyer from changing their mind without valid grounds, relieving the seller when an offer is accepted but not completed.

Increases Acceptance Rate

An offer with a higher earnest money deposit is often more attractive to a seller, especially in competitive markets. Earnest money could make the difference between having your offer accepted or passed over for a more influential one.

The Right Amount of Earnest Money

The amount of earnest money can vary based on the type of property, the market, and the total purchase price. If the market is hot, you may want to offer a higher amount to ensure your offer is accepted. Generally, it ranges from 1% to 5% of the offer price. However, it can be as high as 10% for highly competitive homes with multiple buyers interested.

The Escrow Process

Once the seller accepts the offer, the earnest money is typically held in an escrow account, which means it is securely kept by a third party like a title company, law firm, or real estate broker.  Acceptable forms of payment are wire transfers, certified checks, or personal checks. The third party keeps the money until closing when it will go towards the buyer’s down payment or closing costs. 

When is Earnest Money Refundable?

The return of earnest money is not automatic; its refund is contingent on the parties’ agreed-upon terms. If the buyer pulls out without a valid reason, the seller may be entitled to keep the earnest money. Likewise, if the seller fails to meet the conditions of the offer, the earnest money is usually returned to the buyer. Typical situations where the buyer can walk away with their earnest money can include the following: 

• When a home inspector finds severe housing problems 
• If the appraisal amount is lower than the home sale price and the seller will not re-negotiate the sales price 
• When the buyer can’t secure financing 
• When a buyer is unable to sell their current home before closing on the new one

Buyers will forfeit their earnest money if they waive their financing and inspection contingencies and their mortgage doesn’t go through. Buyers can also lose their earnest money if they fail to close on the agreed date.

Need Further Guidance?

Whether you are a buyer looking to show your commitment or a seller who wants to make a wise choice when vetting offers, understanding earnest money can lead you to a more secure and successful transaction.  If you are looking to buy or sell your home, contact Bradford Miller Law, P.C. We’d be happy to help guide you in your real estate journey.