So what is the deal about Earnest Money?

Have you heard the words EARNEST MONEY and wondered just what the heck your agent is talking about? 

One of the most challenging things to understand in the home buying process is this idea of earnest money. I was reading an article on realtor.com by Beth Braverman recently talking in detail about earnest money. It was very informative, so I thought I would summarize it for you along with a couple of my own thoughts.

Since starting in real estate a couple of years ago, I have always told my clients that earnest money is a symbol; a tangible symbol of the fact that they are seriously interested in buying this house.  In addition to that, Beth made some great points such as the fact that earnest money serves a great purpose to keep people from making offers on multiple houses and then just picking one and walking away from the others, causing the sellers to take them off the market and then get nothing in return.

As you can see, earnest money has a practical application. When we talk about how much to include with an offer, typically it's up to the buyer to decide.  Common practice is around 1% for financed homes up to 10% sometimes on cash offers. What the buyer decides to offer in some cases will influence the seller to actually accept the offer.

So you put in this earnest money and what happens to it?  Unless you do it as cash or a certified check which are deposited immediately, your personal check is held until the offer is accepted and then it is deposited into an escrow account with your real estate company.  The funds are held on deposit until closing at which time they are sent to the attorney or your closing company to be applied towards the purchase price of the house.

Most of the time an offer to purchase is written with contingencies on financing and on inspections.  In those cases if the house fails in the inspection or you're unable to get your loan the earnest money is returned to you fully. There are a couple of times that Beth points out where you're really putting yourself at risk to lose the earnest money.

One of those is when you think it's a very competitive situation so you make your offer without the contingencies of inspection or loan approval.  If you are then unable to purchase for either of these reasons, you may lose your earnest money deposit.  Sometimes in a very competitive market this can make a difference in getting the contract accepted, but it is risky so hopefully it never becomes a decision you have to make.

The second issue is the timeline specified in the contract.  The timeline is actually very important, In writing an offer we set a time for you to start your loan process, typically about three days after signature,  We also set a date for closing based on the type of loan you are getting and any other requirements you have.  As long as you're making a good effort to get the loan to closing the seller is willing to extend the closing date.

The last one is probably the most difficult to get your deposit back from,  and that is when everything is moving well, loans and inspections are on track and you get cold feet.  At that time if you decide you do not want to buy the house you likely won't get your money back as you have taken time away from the seller having a chance to sell it to someone else and likely created some additional costs for them that the earnest money will cover.

As your buyers agents Kelly and I work hard to make sure that you make good decisions and one of those would be around the area of earnest money. If you have any additional questions about this please let us know.