What is Earnest Money?
When you're buying a home, the term "earnest money" may come up. If you’ve heard of it, you might still be wondering about the difference between earnest money and a good faith deposit. If any of this sounds familiar to you, it's time to get down to the basics with earnest money!
What is earnest money in real estate?
An earnest money deposit is not to be confused with a down payment. Earnest money is a deposit of cash or a good-faith check paid with the offer submission. It serves as a way for sellers to ensure that you, the buyer, are serious about finalizing your purchase, rather than being an eager window shopper who will back out on a whim. A down payment is a fiscal promise to your lender in exchange for the funding to follow through on your offer.
While earnest money isn’t technically required in real estate transactions, it’s common practice for buyers to pay at least some amount upfront when they submit an offer on a property. The amount of earnest money you pay depends on the price of your offer and how much other offers are going for in your area.
How much do you put down as earnest money?
However much you put down as earnest money is at the discretion of the seller. Usually, it will vary from 1% to 5% of the purchase price. In some instances, it can go as high as 10%. If you're buying a house for $100,000 and want to put down $5,000 as earnest money, once your offer is accepted, that $5,000 remains in escrow until closing.
Can you get earnest money back?
The short answer is yes.
You can get earnest money back if you don't go through with a purchase, but it depends on your state's laws and the terms of your agreement with the seller. For example, in California and New York, sellers have to return unearned earnest money if they back out of a deal after taking it under contract. If you follow through on the transaction, the money can be split between buyer and seller. Meanwhile, in some other states including Texas and Florida, sellers usually keep any unearned earnest money if they cancel after ownership transfers to you, the buyer. And in states like Pennsylvania where there isn't much regulation around these kinds of situations, things can get sticky. Before agreeing to put down earnest money, know your state-specific rights.
Consult with your realtor, an attorney, and any other trusted real estate or legal professionals before you begin searching for your new home. Especially if you’re in a loosely regulated state, it’s beneficial to know the law ahead of time to avoid losing money in an emotion-based decision. Always take your time reading contracts. Read them thoroughly for understanding. Now is the time to ask “what-if” questions. Your home is probably the most expensive and permanent asset you’ll have to your name.
Who gets the earnest money if the deal goes through?
If your offer goes through, you get your earnest money back! At the closing table, that money can cover your down payment or closing costs. Depending on the rules and contracts involved in the property, you can get all of your earnest money back once the title is officially transferred to your name.
Having an understanding of what earnest money is, how it works, and your legal rights in the process can help you build confidence in your offer. While it might be a minor part of the home-buying process, it's certainly an important one that deserves to be recognized as such.
If you're buying a house and need help finding one that fits your lifestyle needs, Pulte Homes has over 80 years of experience in providing new construction homes with inclusive lifestyle-inspired floorplans! We'll take you on an exclusive tour of homes in your area that meet those needs. Contact an informed sales specialist today!
Contributed to Your Home blog
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Published 06.06.22