What is Earnest Money?

Buying

What is Earnest Money?

Earnest money is a deposit that a buyer makes showing their intention to purchase the home that they have made an offer on. This shows a seller that the buyer is serious about the purchase. These funds are deposits and therefore credited in the transaction at closing towards the purchase price, the buyers’ down payment, and/or the buyers’ closing costs. 

How Much Should a Buyer Offer in Earnest Money?

There is no set rule on this but typically these are between 1% and 5% of the purchase price. In a seller’s market, buyers often increase their earnest money deposit as a way to strengthen their offer. We may advise a buyer to do this if we know they will be competing with other offers. In addition, in a seller’s market, it is common for buyers to release the earnest money to the seller right away or at a designated point in the transaction. This further demonstrates a buyer’s commitment to close on the purchase.

How Does a Buyer Make the Earnest Money Deposit and When is It due?

Each purchase and sale agreement is different. In our market, earnest money deposits are typically due within 3 to 5 days of reaching an agreement to purchase.  The funds are held in escrow with the escrow company that is handling the transaction. The earnest money will be accounted for at the time of closing. A buyer can make this deposit with a personal check, money order, cashier’s check, or a wire transfer. Many escrow companies now have apps to allow you to make this deposit online.

Is an Earnest Money Deposit the same as a downpayment?

Nope. Although both the earnest money and the downpayment contribute to the overall purchase price of the house, the earnest money is security for the seller and the down payment is money a buyer has to put towards the purchase price for the loan that they are looking to secure. Earnest money can however be credited to a buyer as a portion of the down payment.

Earnest Money Deposit


Is earnest money refundable if the transaction falls apart?

Yes and no. There are a number of contingencies in the purchase and sale agreement that allow the buyer to walk away with no penalty and the ability to get their deposit back. Examples of this would be:

  • If the buyer is not satisfied with the inspections and/or terms for repairs cannot be agreed upon between the buyer and the seller.
  • Due to unsatisfactory information on the Sellers’ Property Disclosures.
  • If the buyer does not approve of the findings of the preliminary title report.
  • When the buyer is unable to secure financing for the purchase price.
  • If the property appraisal does not come in at or above the contract price.

It is important to note that each contigency has an allotted number of days for the buyer to terminate. These timelines must be respected in order for a buyer to receive an earnest money refund.

Here are the most common ways buyers can lose their deposit:

  • If a contingency deadline is missed and then the buyer tries to withdraw.
  • When a buyer gets cold feet and just walks away from the sale.
  • If the buyer has agreed to terms in the contract that make any portion of the deposit non-refundable.

How do we protect our buyers’ deposit and help them navigate all of the timelines?

We closely monitor each contract deadline. We also set up a custom transaction portal for each client that allows them to see every contract contingency deadline. Interested in learning more about our process, we’d love to connect.

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May 10, 2021

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