July 24th, 2019 9:25 AM by Jackie A. Graves, President
EARNEST MONEY IS A deposit typically paid
at the time you enter into a contract on a home. It indicates your commitment
to follow through on a home purchase.
But if you're not
expecting to pay earnest money on top of other homebuying expenses, such as closing costs or
the down payment, it may come as a surprise. Understanding what earnest money
is, why you have to pay and when you can get earnest money refunded is an
important first step in the homebuying process.
an Earnest Money Deposit?
Earnest money is a
deposit a homebuyer pays to a home's seller as a show of good faith. The amount
you'll pay for earnest money varies, but typically it's 1% to 5% of the home's
purchase price. A $250,000 home might require an earnest money deposit of
$2,500 to $12,500. When you make an offer on a home, the offer or contract will
spell out how much of an earnest money deposit is required.
Once the offer is accepted, earnest money is paid by the buyer
either by personal check, certified or cashier's check, or wire transfer. The
deposit isn't paid directly to the seller. Instead, it's held in an escrow
account, usually with the seller's real estate broker, title company or escrow
company. The earnest money remains in the escrow account while the details of
the home's purchase are negotiated between the buyer and the seller.
Once the home's purchase
is finalized and the buyer and seller have agreed to any contingencies, all
that's left to do is close. The earnest money deposit is credited toward any
closing costs associated with completing the sale.
Why Sellers Require Earnest Money
Essentially, an earnest
money deposit is a way to signal to a home's seller that you're serious about
"Earnest money is
simply a way to make the buyer have skin in the game," says James McGrath,
licensed real estate broker and co-founder of New York-based real estate
brokerage Yoreevo. "Without it, after a contract is signed, the buyer
could walk away without penalty."
Earnest money offers a
measure of protection to the seller in case the contract falls through under
circumstances not covered by a contingency. That money could be used to
compensate the seller for any costs associated with a failed sale. For
instance, if the buyer pulls out because they decide to make an offer on another
home, the seller could use the earnest money deposit to make up for what
they'll need to spend to market the property again, or make mortgage and
An earnest money deposit
could also give homebuyers an edge in a competitive market. If you find
yourself stuck in a bidding war with another buyer over a home, offering a
large earnest money deposit could persuade the seller to favor your offer. And
the more money you put down for an earnest money deposit, the less you may have
to pay out of pocket later at closing.
There's no law or rule
that requires earnest money to buy a home, but every buyer should be prepared
to pay it, says Avery Carl, a real estate agent based in Nashville, Tennessee.
"Most sellers will
not accept an offer without an earnest money deposit," Carl says.
"It's standard practice to submit a copy of the buyer's earnest money
check with the offer to show seriousness."
Carl says earnest money
offers another protection to home sellers by warding off casual home shoppers.
When cash is required up front to make an offer, it can deter the "tire
kickers" who may not be 100% committed to making a move forward on a home.
This helps the seller avoid wasted time.
Earnest Money Refundable?
While earnest money can
protect the seller, it's also important to protect yourself as the buyer.
That's where including contingencies in your home offer contract comes into
play. Contingencies can allow you to get your earnest money deposit back if you
end up not buying the home.
Some of the most common
You should also include
a contingency that allows you to get your money back if the seller decides to
back out of the sale for any reason.
McGrath says it's to the buyer's advantage to include as many
contingencies in the contract as possible. This would allow you multiple outs
in which you could end the contract without being penalized through the loss of
your earnest money deposit. You could walk away from the home with your deposit
and only lose time, not money.
The type of
contingencies you include in a homebuying contract may depend on how serious
you are about buying a particular home and the state of the local market. If
there's stiff competition for homes and it's a seller's market, then you may
consider limiting contingencies. On the other hand, if it's a buyer's market,
then you may have more room to negotiate.
Of course, the seller
could refuse your contingencies. But you should ask.
Also keep in mind that
there may be deadlines for earnest money to be refunded. This may be two to
three months within making the offer and having it accepted. If the home
purchase isn't finalized in that window, you may forfeit your earnest money
deposit. You could, however, attempt to negotiate a new deadline with the
When Earnest Money Isn't Returnable
While there are several
scenarios where a buyer could get their earnest money deposit refunded, there
are some instances where the seller could keep the money even if the sale isn't
completed. Broadly speaking, that includes any situation not covered by
Say you have a change of
heart about moving out of the home you currently own or rent. Unless your
seller agreed to a contingency that says you could walk away from the purchase
because you change your mind, they'd be entitled to keep your earnest money.
The same may be true if something unforeseen happens that changes your mind
For instance, say you're
engaged and decide to put in a home offer together. But halfway through the
homebuying process, you end up canceling the wedding and no longer want to buy
the house. The seller could choose to return your earnest money, but they
wouldn't be obligated to unless it's covered by a contingency.
Tips for Paying Earnest Money When Buying a Home
Any time you're spending
cash to make a large purchase, it's important to have a strategy. When you're
preparing to buy a home and pay an earnest money deposit, keep these tips in
Finally, ask yourself
whether you're truly ready to buy a home, financially, mentally and
"The No. 1 reason
that earnest money isn't returned is a buyer's wishy-washiness," Carl
says. "So be serious when offering."
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