WHAT IS EARNEST MONEY?
If you’ve never bought a home before, you may hear the phrase earnest money and wonder what exactly it means.
Basically, earnest money is money you put up as part of your offer to show the seller that you’re serious about purchasing the property.
Is It a Down Payment?
No.
Earnest money is not the same thing as your down payment.
Depending on the terms of your contract and the laws and practices where you’re buying, earnest money may ultimately be credited toward your purchase at closing.
Why Does the Seller Want It?
Think of it as part of demonstrating that you’re serious about the contract.
You’re asking the seller to take their property off the market and move forward with you.
Your earnest money is part of that commitment.
What Happens to the Money?
This is where it gets important:
Earnest money is generally held by a third party or escrow agent according to the terms of the contract.
The exact process varies by state and transaction.
And because you’re buying in Illinois, Florida or potentially Tennessee, the rules and terminology can differ depending on where you’re purchasing.
That’s why I don’t want you relying on something your friend in another state tells you.
Your contract and the professionals handling your transaction will determine how the earnest money is handled.
Can I Lose My Earnest Money?
Potentially.
This is why you need to understand your contract and its contingencies.
If a buyer backs out of a transaction without a contractual right to do so, there can be financial consequences, which may include the loss of earnest money.
But if you are exercising a right provided by your contract—for example, a properly written inspection or financing contingency—the outcome can be very different.
The details matter.
Ask Questions Before You Sign
Before you make an offer, you should understand:
- How much earnest money is being requested
- Where the money will be held
- When it must be deposited
- What happens to it at closing
- What happens if the transaction doesn’t close
- What contractual protections apply
Don’t be afraid to ask.
It’s your money.
One More Important Thing
Earnest money is only one part of the financial picture.
You’ll also need to think about your down payment, closing costs, inspection, appraisal, moving expenses and the cash reserves you want to have after closing.
Buying a home is about more than getting to the closing table.
You want to be financially comfortable after you get there.
Have a Question?
Buying a home comes with a lot of questions. You don’t have to figure everything out on your own.
Have a question about something you read here? Want to talk through your situation? Or just not sure what your next step should be?
I’m happy to help.
Schedule a Time to Talk With Karyn
No pressure. No obligation. Just straight answers.
Prefer to just send me a question?