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Do I Have To Give Earnest Money When Buying A Home?

Do I have to give earnest money when buying a home?

Do I Have To Give Earnest Money When Buying A Home?

When buying real estate often times the buyer is expected to give some earnest money as part of the transaction.  Earnest money is usually paid up front when the offer is accepted and is held in a trust account with the listing broker, the buyer’s agent broker or with the title company.  The earnest money stays in a trust account until the real estate transaction is closed or when both parties agree to terminate the transaction and there is agreement as to where the money should go to.  While earnest money is not a requirement it is highly recommended and this article will explore more about earnest money works in a real estate transaction.

Should You Give Earnest Money When Making An Offer?

Earnest money is in essence a good faith deposit that a home buyer or investment real estate buyer is giving that shows they have true interest in purchasing certain property. While earnest money is not a requirement it is highly recommended since it can show the level of interest a buyer has.  It is in essence a down payment put towards the purchase of a home.  Earnest money can be refundable depending on the terms of the real estate purchase contract. If the real estate purchase contract conditions the purchase on a home inspection, appraisal and/or the buyer being able to get a loan to purchase the property then the language of most standard contracts state if those conditions cannot be met the earnest money should be returned to the buyer.

In some commercial real estate transactions sellers will sometimes require some or all of the earnest money to become “hard” or non-refundable due to the time and complexity involved with commercial real estate.  The terms of whether earnest money becomes refundable must be spelled out in the contract and should explain the timelines around when it does become hard. If the buyer is unable to house on moneycomplete the deal or decides they don’t want to purchase the property the seller will get to retain the earnest money per the terms of the contract.

How Much Earnest Money Should Be Given?

There is no set standard with regards to how much earnest money should be given when making an offer. In some locations $1000 per $100,000 in value is suggested whereas in other locations 2-5% of the total purchase price is recommended.  Ultimately it is up to the buyer to determine how much earnest money they want to put down. Some buyers may opt for a smaller amount of earnest money so they can save their cash funds to pay for closing costs and pay for the mortgage down payment.

Some sellers may be hesitant to accept an offer on their house that has what they believe to be a low amount of earnest money.  Those sellers may decide to counter with a higher earnest money request as if the earnest money amount makes a buyer more serious when it is larger.  As most contracts already condition the earnest money being refunded if certain conditions are not met the amount of earnest money really should have little bearing on whether the buyer is serious or not in buying a house.  The seriousness of a buyer is better determined by the overall price offered for the home and whether they are pre-approved with a lender.  The pre-approval letter shows much more seriousness in the desire to purchase a home since the buyers have sat down and gone through the initial process of getting ready to obtain a mortgage. Non-serious buyers do not have pre-approval letters and unless their earnest money represents the entire purchase price of the house the lack of a pre-approval letter should be a bigger factor in determining whether to accept an offer or not.  

What Happens To The Earnest Money?

If everything goes fine and the purchase is set for closing then the earnest money is credited towards the total the buyer is paying the seller.  The title or closing company will compute the credits and debits owed or due from both the seller and the buyer and the earnest money is included in that calculation.  As the money was originally put into a trust account of one of the brokers often times they get to keep the money to offset the commission check they might get and can then withdraw the money from the trust account since the sale has closed.

If either party cancels the purchase using any of the contingencies then a termination of contract form should be signed by both the buyer and the seller.  That termination form should also indicate to whom the earnest money should be returned to.  Earnest money generally should be returned to the buyer when they cancel the purchase offer during a contingency period.  So if the buyer cancels for inspection reasons, financing reasons or some other contract contingency the money should go to the buyer.  If on the other hand the buyer cancels at the last minute because they got cold feet the seller could make a claim for the money.

There must be agreement by the seller and buyer as to who gets the earnest money in order for it to be released.  If there is no agreement then the parties to the contract will have to seek arbitration of file apeople going in different directions case in court in order to get a judge to decide to whom the money should be released to.  As often is the case earnest money amounts may not be that large and a formal lawsuit just for seeking return of earnest money may end up costing more than the actual amount of earnest money that was given.  Arbitration or small claims court may be the better option if available.

Bottom Line

Home buyers who offer earnest money when offering to buy a home are showing a good faith commitment to completing the sale.  As earnest money is optional the amount paid is not as critical as whether or not the buyer has started the loan application process.  Earnest money cannot be released to anyone until closing or by agreement of all parties when the contract is terminated.

Additional Resources

About the author: The above article “Do I Have To Give Earnest Money When Buying A Home?” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.

Discussion

#1 By Gabe Sanders at 9/7/2019 1:34 PM

Savvy home buyers will give a hefty earnest money deposit to make their offer look much more attractive. They will always get this back as long as they follow the contract provisions if the sale does not go through.

#2 By Paul at 9/7/2019 1:36 PM

Thanks for the comment Gabe and I agree!

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