Earnest Money What Is It?

 

Earnest money is a deposit made to a neutral third party (normally escrow) by a buyer to show good faith in a purchase transaction. In return, the seller is showing good faith as well by taking their home off the market with the anticipation the home will close and become the buyer’s possession.

Earnest money is an important element of contract negotiations. It must be part of the purchase contract to be considered valid in the state of Washington.  Earnest money does not necessarily have to be cash.  It could be a goat or chicken, maybe jewelry, or something having value.  In nearly all cases, cash is the accepted method for earnest money.

Is it in the form of a check, money order, or cashier’s check?

Any of these are typically acceptable including wire transfer.   A receipt will be provided to the buyer.

When is the earnest money provided?

Unless otherwise agreed to by parties, the earnest money is deposited with escrow within three days after mutual acceptance of offer.  It is made to the name of the escrow company.

Where does the earnest money go?

The earnest money is typically deposited with an escrow company and held in their trust account.  Escrow handles the closing of the sale by putting all the necessary documentation together.  Escrow operates from a position of neutrality working on behalf of both buyer and seller.  The escrow money can also be deposited with the real estate company or another approved third party source.

How much is the earnest money?

An amount between 1-5% of the sales price is customary although the larger the amount the greater the seller perceives as a strong offer. With a recent transaction, a buyer placed down an earnest money equivalent to the asking price in the amount of $500,000.  Because of this, the seller accepted the offer without reviewing any further offers. The type of market can strategically affect the amount of earnest money the buyer chooses to deliver.

Who directs how the earnest money is used?

The buyer typically dictates what happens with the earnest money.  Escrow money may be used toward the down payment, closing costs, or other costs associated with the loan. The entire amount of earnest money could be refunded in full at time of closing.

When is earnest money forfeited?

If the buyer no longer wants the home without any legal excuse (buyer pulls out of the deal for a reason that isn’t allowed under the purchase contract) the earnest money will be forfeited to the seller.  If any of the contingencies have been satisfied and is no longer a condition of sale, and the sale does not close due to that specific condition, earnest money can be forfeited.  For example, If the buyer agrees to remove the financing condition and the home loan cannot be finalized, the earnest money is subject to forfeiture.

How is earnest returned to buyer?

If the terms of the purchase contract are not satisfied, and the home does not close due to any contingencies that were not removed or satisfied, the earnest money will be refunded to the buyer. The most common grounds for refunding of earnest money is failure of buyer securing financing or a poor home inspection. If the buyer was unable to obtain a loan and the loan condition was not removed, the money will be refunded to the buyer.