What Is Earnest Money?

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The topic of earnest money is one that’s shrouded in confusion. Today we are going to talk about the facts of earnest money, and what you need to know about it.

What is earnest money? It’s a buyer showing the seller they are earnest and sincere about buying the property. What it really functions as is a security blanket. When you place an offer on a home, you are asking the buyer to take it off the market. They want to know that a buyer is invested before they do this, and that’s where earnest money comes in.

I recommend depositing about 1% of the sale price in earnest money. That seems to be the magic number for us. It’s enough to hold the owner’s attention and may save you in the event of a default.

When you pay it, the earnest money is deposited into a trust account for the benefit of both parties. It will not leave that trust account without the agreement of both parties, which leads us to one of the most common myths I hear about earnest money.

I’ve had many people come to me and tell me they believe their earnest money will be forfeited if they end up defaulting. That’s simply not true. If a buyer defaults, that just starts a second negotiation, a negotiation to get out of the contract. Sometimes, the earnest money is enough for the buyers to avoid legal action, which the seller would have the right to pursue if you defaulted.

Assuming no difficulties, the earnest money is applied to the down payment and closing costs at closing. It’s not a donation, it actually counts as part of the cash for your down payment.

If you have any questions for us about earnest money, feel free to give us a call or send us an email.