What Is Earnest Money?
Sa El5-Minute Read
June 22, 2020
Starting the process of buying a home takes a ton of work and can be difficult, especially if you find a home that you love but still haven't figured out the financing.
But what if you knew that submitting an earnest money deposit to the seller can give you time to get financing in place and get you to the closing table much faster.
In this post, we’ll discuss what earnest money is, how it works, and why you’ll probably need it no matter where you’re choosing to move.
Earnest Money Definition
Earnest money is the deposit a likely buyer can make on a property to demonstrate to the seller their good faith in the transaction. With an earnest money deposit in place, the buyer's offer is still contingent on certain transactional expectations being met by both parties.
Still, it demonstrates to the seller that the buyer is serious about wanting to purchase the property.
If you find a community or home that you like, the first thing you should ask your agent is what the earnest money will be so that you’re sure you can start the purchasing process if you find a home you love.
Also, keep in mind that if you put down a larger earnest money deposit, you can request to pay them over a few months.
For instance, if you’re buying a home for $350,000 and the earnest money deposit is 5%, you’ll need to put down $17,500 but could ask the seller to accept two payments of $8,750 over 2 months.
The good news is that the earnest money will become part of your down payment when you close so you aren't paying anything "extra" when you deposit earnest money.
Is Earnest Money Refundable?
Yes, your earnest money is refundable; however, there are a few instances where your earnest money could be lost if you don't meet certain contractual obligations.
If your closing was to go awry based on you missing a specific deadline, then you can lose your earnest money.
However, certain contingencies allow you to withdraw from your contract without losing your refund, and those are:
- A home inspection contingency – If there are serious structural or repair issues.
- Financing contingency – Your mortgage financing falls through.
- Appraisal contingency – The home does not appraise for the purchase price.
- Title contingency – A title search reveals problems with the property's title.
- Home sale contingency – If you can't find a buyer for your current home
It's honestly an advantage for you to include as many contingencies as possible that way, you can protect your earnest money deposit.
Protecting your earnest money should be one of your biggest concerns, so it's important to follow all of the rules of your contract.
Be sure to ask your real estate agent about any additional situations that could affect your ability to obtain your earnest money back if things fall through.
What Does Earnest Money Do For Home Buyers?
Putting down earnest money tells the seller that you’re a serious buyer and that you have the resources to close on your home.
It also gives you time to get the correct funding in place for your home and to get all of the required property inspections and home appraisals you’re going to need before you can close on your home.
Another thing earnest money does for a home buyer is help them get focused. I have found that when money starts to exchange hands, people start to get serious.
Remember, the earnest money is there to protect the seller as well. If you decide to step away from your contract for a reason not covered by a contract contingency, the seller is usually able to keep the earnest money.
How Much Earnest Money Do You Need?
From my experience, the amount of earnest money you have to put down is going to depend on several factors such as:
- the selling market
- if you're buying a new or old home
- property location
- the builder
Earnest money can be as low as a few hundred dollars or as high as several thousand – this is especially true for new homes.
There are instances where one community has a set $5,000 earnest money deposit. Still, another location in the same area may require a deposit of 5% of the price of the home.
Once a seller accepts your offer, the earnest money can be paid by a certified or cashier's check, wire transfer, or a personal check.
You will not be paying the funds to the seller directly; instead, the money will be held in an escrow account with the seller's real estate broker or escrow company.
Your earnest money will stay in escrow until closing and will be rolled into your down payment.
Earnest Money Vs. Down Payment
The easiest way to understand the differences between a down payment and earnest money is that the down payment is required by your lender for you to close on the home.
When you deal with a lender for your home, they will only fund up to a certain amount of the loan, requiring you to come to the closing table with the remainder.
Earnest money is an amount given to the seller to show that you have good faith in purchasing a home.
You’re looking to buy a home for $250,000, you get your preapproval or approval from your lender based on you paying at least 10% of the loan amount.
You go out and find the home of your dreams, but before the seller is willing to start the process of selling you their home, they request that you pay $6,000 in earnest money.
Once you make this earnest money payment, the process for closing or building your home will start, and you will start preparing for the closing.
Since you have already paid the seller your earnest money of $6,000, you only need to come to the closing with a check for $19,000 to close on your home because the earnest money rolls into the down payment.
Paid To Show Good Faith
Paid To Close On Loan
Can Be Lost If You Don't Close
Can't Be Lost
Not Required To Purchase Home
Usually Required To Buy A Home
The Bottom Line
You're going to have to make an earnest money deposit on pretty much any home you’re looking to purchase, but these funds will roll into your down payment.
It's a great idea to have your earnest money on hand when you’re searching for a home to make sure you can put in an offer if you find one that you like.
To avoid losing your earnest money check and to find the right home, you should speak with a Rocket Homes Real Estate LLC Partner Agent to help you understand your specific earnest money situation.
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