Buying a home is a big step in one’s life. It comes with significant financial responsibility. As a first-time home buyer, you’ll want to ensure you understand the home-buying process.
One of the essential aspects of a home purchase is earnest money. Your earnest money deposit is the glue that keeps a real estate transaction together.
It gives a seller confidence that you’re serious about buying their property. We will examine everything you should know about earnest deposits with our FAQs.
From many years of experience in selling real estate these are the most frequently asked questions about earnest money. Whether you are buying or selling it is vital to know these answers. Not understanding good faith money can lead to significant problems and loss of your funds.
Let’s dig in.
What is Earnest Money?
Earnest money, or EMD for short, is a financial term used to describe a sum a buyer provides as a show of good faith when entering a real estate transaction. It serves as a security deposit and demonstrates the buyer’s commitment to purchasing the property.
It is customary to have an earnest deposit whether you are buying a home, condo, townhouse, or land.
How Much Are Earnest Money Deposits?
The amount of an EMD is typically negotiated between the buyer and seller, but it is commonly around 1-5% of the total purchase price.
This money is held in an escrow account until the closing of the transaction, at which point it is either applied towards the down payment or returned to the buyer if the deal falls through.
Earnest money reassures sellers that buyers are serious about their offer, and it helps protect both parties from any potential breach of contract.
It is essential to note that the deposit with new construction could be higher. Builders often ask for deposits of ten percent of the purchase price.
The larger deposit is especially true when they are custom building a home.
What Should a Buyer Consider When Deciding on The Amount to Offer?
Buyers should consider several factors before deciding on the amount of earnest money to offer. They should assess the local real estate market conditions and competition.
If a seller’s market has high demand and low inventory, offering more earnest money can demonstrate their seriousness and commitment to the purchase. The difference between a buyer’s and seller’s market is a significant factor in what’s offered.
Buyers should consider their financial situation and ability to cover the earnest money deposit if the deal falls through. Buyers should offer an amount they are comfortable with, evaluating potential risks.
Lastly, buyers should review the terms of the purchase agreement and consult with their real estate agent or attorney to ensure they understand any potential consequences or contingencies related to the deposit.
Can a Seller Reject an Offer Based Upon The Deposit Offered?
A seller can reject an offer based on the earnest money offered. Earnest money is a security deposit demonstrating the buyer’s commitment to purchasing the property.
It guarantees that the buyer will follow through with the transaction. If the seller feels that the earnest money offered is insufficient to protect their interests in case of a failed deal, they have the right to reject the offer.
A higher amount of earnest money provides greater assurance to the seller that the buyer is serious about completing the purchase. Therefore, buyers must consider offering an appropriate and competitive amount of earnest money when offering on a property.
Over the years one of the most common times a buyer’s earnest funds are too low is with VA loan buyers. Unfortunately, many veterans do not have additional funds saved to put down. The big advantage of VA loans is the no down payment requirement.
While it can be disappointing for veterans, it’s understandable why some home sellers fear having little or no deposit money. An excellent real estate agent will explain why having an EMD is crucial to VA buyers.
Buyers should do what they can to provide the seller some security if they back out of the sale.
When is it Paid?
During the initial stages of a real estate transaction, typically when making an offer on a property, the buyer typically pays earnest money. The buyer usually completes the earnest money payment within 24 hours after the seller accepts the offer.
This allows sufficient time for both parties to negotiate and finalize the terms of the sale before proceeding with the transaction.
By paying the EMD upfront, buyers show their willingness to proceed with the purchase and provide some financial security to the seller if they back out of the deal.Click To TweetWho Holds The Buyer’s Funds?
One of four parties in a real estate transaction almost always holds the deposits. They include the following:
- The listing real estate brokerage
- The seller’s real estate attorney
- A third-party escrow company
- A title company
The monies are held in an escrow account and accounted for at closing time.
It is highly unusual for a seller to hold a buyer’s funds. Home buyers should not allow this. It would be a conflict of interest if there is a dispute.
Is Earnest Money Refundable?
This is perhaps the most common FAQ about an EMD.
Yes, earnest deposit funds are refundable if the buyer performs according to the real estate contract.
Suppose the buyer decides not to proceed with the purchase for valid reasons, such as failed inspections or inability to secure financing. In that case, they usually receive a refund of the earnest money.
However, it is essential to note that the specific terms and conditions regarding the refundability of earnest money can vary depending on the state and the terms outlined in the purchase agreement.
It is always advisable for buyers to carefully review these terms before making an earnest money deposit.
When Can a Seller Keep a Buyer’s Deposit?
A buyer can lose their earnest money when they don’t follow the contract terms. Here are a few examples of when a seller could keep a buyer’s money. See our helpful resource for additional instances besides the ones outlined below.
- Failure to respond after the home inspection by the deadline: in an offer to purchase that has a home inspection contingency; there is a specific date by which a buyer must respond. The contingency date clarifies that the buyer must terminate the sale, move forward, or request an extension to renegotiate the terms. If the date passes without the buyer responding, the seller could keep their money if they did not move forward.
- Lack of notification on getting financing: when a buyer receives a loan, the contract will have a mortgage contingency. The contingency will outline the date by which the buyer must procure funding. If the buyer lets the date lapse, they would no longer have a contingency. A seller can keep the deposit if they don’t move forward.
- Cold feet or buyer’s remorse: sometimes, buyers decide they no longer want the house. When there is no valid reason other than a change of heart, the buyer will lose their good faith money. Backing out of a contract has consequences.
How is Earnest Money Different From a Down Payment?
Earnest money and down payments play different roles in real estate transactions. The buyer makes an earnest money deposit to demonstrate their serious intent to purchase the property, typically amounting to 1-5% of the purchase price.
The deposit is held in escrow until the closing of the transaction.
In contrast, the buyer pays a more significant sum of money as a down payment at the time of closing. The purpose of the down payment is to decrease the total loan amount.
It is typically a percentage of the purchase price. Many buyers will put down ten percent or more.
What Happens If There Are Disputes Over Who Keeps The Money?
In real estate transactions that fall through, it is not uncommon for buyers and sellers to fight over who gets to keep the money. When there is a dispute, most contracts state that the funds will remain in escrow until a resolution.
In many instances, the contract will state that a court of competent jurisdiction will decide who gets the funds. Even in cases where one party deserves the money, a real estate brokerage cannot release the funds.
What Are The Typical Timelines For Returning The Money?
Typically, the timelines for refunding earnest money after a failed transaction vary depending on various factors.
In most cases, when there is no dispute, the seller customarily refunds the earnest money within a couple of weeks of the transaction falling through.
However, local laws, regulations, and specific terms outlined in the purchase agreement or contract can influence this timeline.
Buyers and sellers should consult their respective real estate agents or legal advisors to ensure they understand the specific timelines and procedures involved in earnest money refunds in their jurisdiction.
In some cases, the money is returned within a few days.
What Are Common Mistakes to Avoid?
Buying a house doesn’t happen often enough for most people to be experts. That is certainly the case with good-faith money. Plenty of home buyers make earnest money mistakes. Here is what you’ll want to avoid doing:
- Offering a deposit below what is customary for the local market.
- Failing to meet the contingency deadlines which puts your earnest money in jeopardy of being forfeited.
- Waiving contingencies, you shouldn’t.
- Not thinking through the purchase creates the desire to back out.
- Not realizing that your money could be tied up for months if there was a dispute.
Final Thoughts
As you have learned, there is much to know about earnest money in real estate. If you have other questions you would like answered, feel free to contact me.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on FAQs about earnest money. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
