Earnest Money: What Is It and Why Do Buyers Need It?

When making an offer on a home, a buyer is asked to provide earnest money to the seller. When I made an offer on my first home, I remember earnest money commonly being set at $500. Now, it is not uncommon to have the earnest money set as high as $10,000.

The thought of providing $10,000 along with an offer to purchase a home can be a little scary. Where does the money go? Does the seller keep it? Can it ever be returned to the buyer? Let’s cover a few of those questions and help put your mind at ease.

1. What is the earnest money for?

The earnest money provides assurance that you, the buyer, is making a serious offer and is committed to seeing the purchase process through to closing.

2. Is the earnest money given to the seller?

No. Your earnest money is deposited into a trust account managed by an independent party to the transaction, most likely the title company, within 48 hours of making the offer.

3. If it is held in a trust account, who will eventually receive the money?

You. Your earnest money will stay in that trust account until closing when it is credited back to you and subtracted from your closing costs.

4. Can a buyer lose the earnest money?

If you decide you no longer want to purchase the home and have no legal reason (i.e. those listed in the purchase contract) to end the agreement, the seller may keep the earnest money.  

5. What happens if a buyer terminates the contract for a legal reason?

The purchase contract includes contingencies for the buyer to end the purchase contract which usually have to do with the appraisal report, home inspection, or even any existing HOA rules. If a buyer decides to terminate the contract based on one of these contingencies, the earnest money will be returned.

These answers represent what typically happens in a transaction to buy a home. There are always exceptions and, since some situations can be unique legally-speaking, it is a good idea to read the purchase agreement thoroughly and seek advice from your real estate agent, accountant, lawyer, or other professional.

Do you have questions about what goes into buying a home? I would be happy to help! Contact me at penny@pennyshousetohome.com for a no obligation meeting to get your questions answered.