What is earnest money, how much should it be, and can I get it back?

 

What is earnest money, how much should it be, and can I get it back?

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When submitting an offer to a seller, there’s a place in the contract to specify the amount of earnest money that is accompanying your offer.

Earnest money is a deposit paid by a prospective buyer to show good-faith intention to complete the transaction.

In the event the contract closes, the earnest money deposit goes toward the purchase price as if the buyer brought the money to closing.

It is ordinarily forfeited if the buyer defaults. Some consider it an amount to compensate the seller for lost time on market (because it was in Pending status instead of Active / For Sale status), but technically it’s just part of a contract and should be distributed per the terms of the contract in the event it does not close.

Earnest money is usually returned in full to the buyer in the event the seller defaults or the buyer cancels the contract due to lack of acceptable financing or inspection results, provided there are such cancelation provisions within the contract and that the buyer cancels within the agreed time periods.

Earnest money might be $500-$1,000 when the purchase price is $100,000 or less. Or it could be $1,000-2,000 for contracts under $200,000. Technically, earnest money can be an item of value instead of a check, but it’s harder to deal with and is very uncommon.

Earnest money amounts might also be something like 10% of the purchase price (e.g. $10,000) to show an extraordinary commitment to closing the deal, which might influence the seller to choose that offer instead of another one even if it results in less net proceeds to them.

Earnest money must be held in trust. Most often, the trust/escrow account of the listing broker, selling broker, or a title company is used.


Real Estate Answers: Buying

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