The Importance of Earnest Money

Posted by on Thursday, November 8th, 2018 at 2:10pm.

This is exciting!  Earnest Money is the first step in your contract that gets executed and it means that you are under contract! Whoop Whoop! But what does Earnest money mean and how does its affect you as a buyer or seller?

Investopedia comes to the rescue again to give us the technical explanation:

Earnest money is a deposit made to a seller indicating the buyer's good faith in an arrangement. Often used in real estate transactions, earnest money allows the buyer additional time when seeking financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.

On a more relatable, real life level, Earnest Money is a buyer putting some skin in the game. 

Once your offer is accepted you will be asked to deliver the Earnest Money in the amount stated in the contract by way of certified funds.  The deadline is typically between 1-3 days after a mutually executed contract and the amount varies between 1-3% of the purchase price.  If you are purchasing a home for $450,000.00 the earnest money will most likely range from $4,500-13,500.00.  This money is given to the title agency agreed upon in the contract.  The title company will hold the money in an escrow account until closing.  If for some reason the contract is terminated the title company will disburse the funds.  Now, keep in mind that this money is given as good faith that you intend to purchase the property.  The buyer has the right to terminate without cause at anytime but will risk losing the earnest money back.  If the buyer terminates for a cause related to a date + deadline in the contract the earnest money is refundable.  

A few things to note:

  • Make sure you have the money in the bank.  Do not try to transfer money day of… it doesn’t work well. 
  • You will know the amount needed before you even make an offer
  • You can raise the amount if you feel it would sweeten the offer
  • Your Earnest Money will be credited towards your down payment. Yay!
  • You or your Realtor can deliver the funds to the Title company (if your agent does it you don’t have to miss work anymore ;)).
  • Make sure to get a receipt and send to your agent to share with all parties.
  • Dont miss the deadline, you could lose your house!

Have questions or comments?  Please reach out

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