So what is earnest money? Earnest money is similar to an advance downpayment related to the home buying process, that shows your commitment to carrying out the terms and conditions of the purchase agreement.

The typical earnest money amount is usually 1% of the purchase price, but can be up to 5% depending on local customs. Each home purchase is different, and may require a variation of the earnest money amount, so seek the advice from your Realtor, in order to make your offer competitive, especially in a multiple offer situation.

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What is Earnest Money

So where does the earnest money go?

You find the perfect home, you write an offer, this earnest money check will accompany your initial offer to purchase the seller’s home. At that time, the seller will review your offer and terms and decide to either counter your offer or accept it as-is. Depending on your offer and the current market status, a low ball offer may not be accepted by the seller, and therefore rejected all together.

For example purposes, let’s just say the offer was presented and accepted. You now have 72 hours (or whatever time is set in your area) to get that money to the listing broker’s office. This money will then be held in a trust account (bank account) until the actual closing takes place. The earnest money funds can be a personal check, certified funds, or it can be electronically deposited through a service called TrustFunds.

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Either form of payment, they will all be deposited in a trust account. When you get to the closing table, this amount will be deducted from your total fees to purchase the home.

Now let’s say you’re in a situation of multiple offers being presented on the home, and your offer is NOT accepted. You will have no obligation to present your earnest money check. If a check was presented, the funds will be returned to you without penalty.

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Now for example, let’s say your offer was accepted. You submitted your earnest money funds to the listing agent’s trust funds account and you proceeded with your purchase. You complete your inspections on the property and everything is running smooth. At some point, prior to closing, you decide you don’t want to go through with the purchase and you decide to cancel your offer, the earnest money can be kept by the seller. Depending on the circumstances, the seller may return a portion of the funds, but as long as it’s not related to any contingencies written in your offer it is within their rights to keep the money.

Now, be advised, this article is an overview of earnest money and not about cancelling a contract as this can be considered a breach of contract and can turn into a legal matter. Since every situation is different it would be hard to advise on that scenario, but it is just another reason to make sure you’re Realtor is local, experienced and knowledgeable so that you’re protected through the home buying process.

If you’re thinking geez, that sounds scary, it’s not! A professional Real Estate agent will ensure you’re making the right moves during the home buying process. Yes, you can get the earnest money back if the home ends up having structural issues, the sellers are unwilling to re-negotiate or fix, repairs that you requested, etc. You can also get the earnest money back if you do not agree with the homeowner’s association managing the property, or you find out that they’re not financially in good standings. At some point if you suffer a job loss or change of wages and no longer qualify for the loan you would also get your earnest money back. All these things I have listed are related to contingencies of the contract, basically a safeguard for the what-if’s during the home buying process.

What if the earnest money isn’t mine?

Very important! Earnest money can come from a friend, relative or whomever, this is known as a “gift.” If you know that another person will be writing or giving you the money for the earnest money, it’s very important to alert your lender and Realtor of this scenario as it’s important for your lender to see the paper trail of where the money is coming from. Most lenders will also require that a “gift letter” is written from the person that is giving you the money. If you’re thinking I’ll just get cash and put it in my account… DON’T… an improper deposit of the earnest money can cause a delay in closing. It’s best to consult your lender on how they want you to receive the money, typically it will be a check that will be deposited in your bank account and will sit there, through the buying process. Your lender will likely verify this money by looking at your bank statements and the person giving it to you. Verifying funds are very important during the home buying process.

I hope this has answered your questions regarding the importance of earnest money, what earnest money is and how much you will need.

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