What is Earnest Money?

Real estate lingo is important for both home buyers and sellers to get acquainted with early on in the process. Understanding real estate phrases and wording will actually help you get a great agent! There’s a lot of home buyer lingo out there but today we want to focus on earnest money. What is earnest money? And why you’re smart to look it up before starting the process of home buying or selling!

There is a very simple answer… Earnest money deposit (EMD) is money you put down on a home transaction to tell the seller you’re serious. In this case, money talks! If you’re a home buyer and are 100% positive that this home is for you; put down an earnest money! Now, this is not the same as a down payment. A down payment doesn’t go to the seller directly, it goes through a loan company. Of course, your earnest money doesn’t go straight to the seller either. When you give earnest money it goes in to an escrow account. This means there’s no worries about someone running off with your money.

This home buyer lingo is something your Realtor should inform you of, regardless. Real estate lingo can get lengthy and complicated! But, chances are that you’ll buy or sell a home multiple times in your life. Let’s get a couple other questions about earnest money clarified as well.

How much Earnest money should I give?

You will typically give 1-5% of your purchase price as your earnest money. Note that this is not the list price or the appraisal price. This is the price you and the seller have agreed upon for payment. So if you agree on a purchase price of $250k; your EMD should total a minimum of $2,500. I usually tell clients to split the difference and pay about 3% though.

Who do I give this money to?

Well, you’re Realtor will handle that for you. Meaning they’ll tell you where to transfer the money. It should be an escrow or title company – you’re not giving this money to any one individual. In some cases it will be a Broker though. The money will then be held in escrow until the completion of the home buying process.

Does the money go toward the cost of the home?

YES! Your EMD is a good faith sum of money but it’s not only that. Once your transaction is complete, that money will go toward your home purchase.

Can I get my earnest money back?

Yes and no, depending on the situation. First off, if the seller walks away from the deal, you will 100% get your earnest money back. If your mortgage loan doesn’t go through for whatever reason, you’re very likely to get your earnest money back. This is one reason why getting fully approved for a loan beforehand is important. If an inspection fails you should get your money back as well. When you may not get your money back is if you suddenly decide to walk away from the deal. Without a good reason and without notice, you are likely to not get your money back. However, if you give enough notice and have a good reason, you may still get your money back. The point is not to give earnest money if you’re not serious.

Is Earnest Money Always Required?

No, it’s not. And it’s something you are free to negotiate. If the buyer’s market is competitive, you’ll want to give earnest money to secure the purchase of your new home. If you’re struggling for money or just don’t want to hand over that money, you can communicate that to your seller. Most understand and earnest money isn’t always warranted. Just know that if you don’t give that money, the seller could go with another buyer at any time.

How do I get earnest money?

You can use your savings or get a loan. You typically will need that money available separately from your approved home loan though. Your earnest money is given by you directly via check or money order, usually. So if you don’t have the money in savings that you can part with, try for a small personal loan. Of course this can be rough when the bank sees you’re already applying for a home loan. The fact is that a lot of buyers aren’t told about earnest money and it comes as a surprise. Don’t let earnest money scare you away from the process though. Like we said above, it’s not always a must.

Is there anything else I should know?

You should know that real estate lingo regarding earnest money can vary. It’s also called an earnest money deposit or EMD.

Answering the question of “What is earnest money” is pretty straight forward, right? While your Realtor should be happy to discuss this with you, it’s always nice to have knowledge beforehand. We should also note that every home transaction is different so there will be varying nuances during your process. Your Realtor will be a very important part of the home buying process. Find the Realtor that suits you perfectly at USDRE.com!