Earnest Money: What Is It?

Photo by Mercigod via Shutterstock

Earnest money is the amount of money put down for a large purchase. While this is not limited to real estate, it is used frequently in the real estate industry. It’s a sign of good faith from the buyer to the seller and normally constitutes about 1%-5% of the home’s price.

How much do you deposit?

There is no set amount for how much you can put down in your earnest account. However, the more money you put into these accounts, the more likely you are to be taken seriously by the seller.

Who gets the money?

Property laws in most states have strict regulations for who holds the money. Most often a third-party escrow company, title company or sometimes the buyer’s broker opens a trust account to hold the funds until completion or dissolution of the sales contract. At that point, the funds go to wherever the contract specifies. That could be back to the buyer or forfeited to the seller. In some cases, the earnest money might go to the real estate agent. If the sale goes through, the funds go toward the buyer’s costs in the transaction, and it appears as a credit on the settlement statement.

To protect yourself from forfeiting earnest money, be fully prepared to complete the sales transaction. Have a pre-qualification letter from your lender, set aside funds for the down payment and closing, and provide the lender, escrow officer, title company and all other interested parties with the information they need for a timely close.

If you wonder about how much earnest money to include, your best resource is your knowledgeable real estate professional.