What is Earnest Money?

Have you heard of the term earnest money? I find my self needing to explain what earnest money is to most of my clients. It is important for both the buyer and seller to understand what earnest money is and why we use earnest money in a real estate transaction.

Definition of Earnest Money – Money paid to confirm a contract.

What does that mean to you the buyer or seller?

Earnest money is an important factor in showing how sincere a buyer is with their offer. Offers with low or no earnest money make sellers nervous and the offer does not appear to be very strong.

If a home is listed for $150,000 and you put in a full price offer with $100 earnest money your offer appears weak. The same full price offer with $1,500 earnest money appears very strong. In my area it is typical to have earnest money to be around 1% of the purchase price.

This is helpful when you are in a multiple offer situation. I had a listing last week that went on the market on Monday. On Tuesday we had 5 offers on the table after 13 showings. The offer that the seller accepted had an earnest money deposit of 2.5% of the purchase price.

The earnest money check is written at the time the offer is written. It gets deposited when the offer is accepted. It will be deposited into an account with the Real Estate Company or the Title Company, whichever is deemed necessary by the seller.

The earnest money is credited towards the buyers closing costs. If everything goes as planned and the deal goes through, the buyer’s earnest money will reduce the amount of money the buyer will need to bring to the closing table.

If the transaction does not go through the money could be released to either the buyer or seller depending on how the purchase agreement was written. If the either party terminates the contract due to any issue covered by a contingency, then the money will be released to the buyer. If the buyer terminates the deal for any reason not covered by a contingency in the purchase agreement, then the money will be released to the seller.

Earnest money is helpful for both the buyer and the seller and both can use it to their advantage. For a buyer, you can use the Earnest Money to improve your chances of getting the home you want. If you need help finding your dream home read my article “5 Tip to Finding Your Dream Home” or “Path to Homeownership.”

On the seller’s side, in multiple offer situations earnest money can help you determine what offer is the best. It will show you how much a buyer wants your home and it makes the buyer have money at risk, so the buyer can’t just walk away.

Now that you understand earnest money better you can be more confident in your next real estate transaction. Do you have any other real estate terms that you don’t completely understand? Leave me a reply and let me know what real estate terms you would like me to explain next time. Also, I have a real estate “Vocabulary” list in the Buyers page of the Resources Section that might be helpful