What is Earnest Money?

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A common question in real estate transactions is, “What is earnest money?” That question is then followed by, “Why should I submit earnest money with my offer?” These are two very important questions that we are happy to answer. We’ll also touch on a few related questions that often come up during this discussion.

What is Earnest Money?

Though an earnest money is not required in an offer, when presented with your offer it shows a seller that you have a strong and genuine intent to purchase their property. It represents a commitment from you to fulfill your contract and see the transaction through to closing. As a buyer, always consider it something that can be lost, if without legal excuse, you fail to fulfill your contract.

How Much Should Earnest Money Be?

As a buyer, you ultimately choose how much earnest money you should include with your offer. However, it is common to include a minimum of 1% of the offer price. This means that the amount of earnest money will vary wildly depending upon the price of the home. On average, earnest money fluctuates between 1% and 3% of the price of the home. Additionally, in a hot market, buyers wanting to submit a head turning offer to capture the attention of the seller will submit a much more compelling amount.

Is My Earnest Money Refundable?

If you back out of your contract with legal excuse, the answer in many cases is yes. Alternatively, if the seller accepts your offer and then you change your mind without legal excuse, often it is forfeit. There are a variety of instances where your earnest money is not refundable. Be sure to thoroughly discuss the details with your real estate broker and consider consulting legal counsel.

What is My Earnest Money Used For?

It is a common misconception that earnest money is in addition to, or on top of your offer. The truth is, your earnest money, whatever the amount, will be applied to your down payment and/or closing costs.

Where Does My Earnest Money Go and Who Gets It?

Once your offer is accepted, your earnest money is deposited and held either in escrow’s trust account or in your real estate broker’s trust account until closing day. Your earnest money can be presented in the form of a wire transfer, cashier’s check or personal check. There are options for delivering your funds to your closing company; A courier can pick up your check from your agent’s office, you may drop it off in person, or it can be wired to your closing company.
Fun fact to keep in mind if you live in Washington State: If your earnest money is over $10,000.00 and is held by your broker’s trust account, the state does make interest on that money.

Still have questions? Then give us a shout, we’re happy to answer any questions you have on the journey to buying your home.

Are you looking for more information about buying a home? Click here to read our home buying tips.