What is earnest money in Real Estate? Where does earnest money go? How does earnest money work? Is it Refundable? In this video, you’ll learn exactly what the good faith deposit in a real estate purchase is for when it gets cashed, and what happens if you cancel and want it back.
Today, we are going to be talking about earnest money. What is it, how is it paid, is it refundable, and how does it work?
What is Earnest Money?
Earnest money is a deposit a buyer makes on a home they want to purchase, typically 1-10% of the sales price. This is considered “good faith” money and is not in addition to your offer price but part of your offer price.
Sellers tend to favor these good-faith deposits to ensure that the sale won’t fall through. Earnest money can act as added insurance for both parties in the transaction.
How is Earnest Money Paid?
Earnest money is usually paid by certified check, personal check, or a wire transfer into a trust or escrow account that is held by a real estate brokerage, legal firm, or title company until closing. It is due within 3 calendar days after the offer has been accepted.
For example, let’s say you found this wonderful house and you want to make sure that your offer stands out and you want the seller to know that you are serious about buying their house. You make an offer on the home valued at $300,000 dollars on Monday and you agree to put down 3% earnest money. Your offer is accepted on Monday evening, you would write a check to the holder of the earnest money (i.e. the title company) for $9,000 dollars. You would have 3 calendar days or in this example till Thursday to deposit the money into the account.
What if the Earnest money isn’t received within 3 calendar days?
You would be considered in breach of contract and the Seller can terminate the contract.
What happens to my earnest money at closing?
It depends on what your contract states. In most cases, it will be applied to your closing costs or you may have the money returned to you.
So in our example, if you are purchasing a $300,000 dollar home and you already put $9,000.00 down as earnest money that will be applied to your closing costs and loan amount.
Is my Earnest money refundable?
Contrary to popular belief, homebuyers don’t always forfeit their earnest money to the seller if a deal fails. The buyer gets their good faith deposit back if the seller terminates the home sale without a valid reason.
Earnest money can also be refundable if certain contingencies put into the contract are met due to no fault of the buyer. These include
- Severe housing defects revealed during a home inspection
- If the appraisal amount is lower than the home sale price and the seller will not re-negotiate the sales price
- The homebuyer can’t secure financing
- When a buyer is unable to sell their current home before closing on the new one
Since the seller is required to take the property off of the market during the appraisal process it is possible to lose your earnest money if you back out of the deal for a reason not listed in the contract, you waive any contingencies, you ignore contract timelines, or if you cause a condition for the contingency not to be met.
Back to our example, you’re going to purchase this wonderful $300,000 dollar home and need new furniture. Wait until you own the home because your credit will be rerun right before closing.
To recap
- Earnest money is considered“good faith” money that a buyer puts down to ensure the seller that they are serious. Typically 1-10% of the purchase price
- It is due within 3 days of an accepted contract
- It can be used toward closing costs/purchase price at closing
- It can be refundable if certain contingencies are put into the contract
- It is a good way to have your offer stand out above the competition
If you have questions for me please feel free to reach out.
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