What is earnest money?

The "book definition" of earnest money is: "a sum of money given to bind an agreement, such as the sale of real estate, the advance of a loan or some other transaction requiring a deposit. Earnest money is forfeited by the donor if he or she fails to carry out the terms of the contract or agreement."

In other words, earnest money is money applied "up front" from a buyer to show a seller the buyer is serious about the purchase. The money is deposited in an escrow account and held by the escrow company. Usually (but not always) the earnest money is applied toward the buyer's down payment.

We are frequently asked, "How much earnest money do I need?". This is a difficult question to answer. Earnest money is not required, though the vast majority of sellers expect it, and an offer without any earnest money attached will usually be rejected.

There is no "standard amount" for earnest money. The bottom line is the amount required is whatever it takes to convince the seller you're serious about making the purchase. That can be anything... a "typical" suggested amount is 1% of the purchase price, but this varies greatly.

Earnest money is released to the seller if the buyer defaults on the contract after it's accepted. If the contract fails due to no fault of the buyer, then earnest money is typically returned in full to the buyer.

Earnest money, like virtually any part of a real estate transaction, is a negotiable item.

If you're new here, you may want to subscribe to this blog via email or RSS feed. Thanks for visiting!