What is Earnest Money?

Photo by National Association of Realtors

We get this question a lot, particularly from first-time home buyers. What exactly IS earnest money and why is it needed? Let us help explain (along with realtor.com)!

Earnest money is essentially a deposit a buyer makes on a home they want to purchase. Usually this deposit is 1% to 10% of the purchase price. This money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing. To be “under contract” means the buyer has made an offer in writing and MUST include an exchange of something of value between the parties. Money is often part of the exchange in real estate transactions. This is earnest money. Without earnest money, you do not have a contract.

Earnest money is usually held by the real estate broker of the buyer, but can be held by the seller’s real estate broker or the title company or law firm responsible for the closing. The check WILL be cashed and held until closing, unless a contingency breaks the contract or one of the parties breaks the contract. If a contingency is not met and the buyer decides not to purchase the home, the buyer will get their earnest money back and the contract will be terminated. If the buyer just decides they do not want to purchase the house (for no reason, just backing out), the seller will be entitled to the earnest money. It can get tricky in some situations, so it’s always good to have a realtor involved to help with those difficult situations, should they arise.