What Is Earnest Money?
Everyone’s heard of earnest money but, especially if you are just starting out, you may not have a clear concept of just what it really IS.
Whenever you make an offer on a property you will write a check (yes, bring your checkbook!) to accompany an offer. The reason it’s called earnest money, is because it actually speaks to how “earnest” (serious) you are about purchasing this property. In general, the more the earnest check, the more earnest you are about getting the place. This is why it is also sometimes called a good-faith deposit. Now that money continues to be yours, it’s just held for you until you close.
Granted there may be limiting factors, such as how much do you really want the place vs. how much cash you have sitting around. Many properties (especially bank properties) even have certain requirements for the earnest money. Like they might say:
Earnest money must be at least 1% of the total purchase price
Or
Earnest money must be at least $5000
Or
Earnest checks must be in the form of cashier’s check or money order
Or any variety of other specific requirements – just be aware, sometimes there are requirements and minimums.
Depending on the price and location of the property, an earnest money check could be as low as $500-$1000 or on up to 5% or more of the purchase price. Again, the higher the dollar amount, the more serious you are telling the seller you are.
When the offer is submitted, the earnest check is submitted too. When an offer is accepted (has both buyer & seller signatures on everything), that check is deposited into an escrow account of the sellers brokers choice and it sits there until close at which time it is applied to your closing costs, down payment, discount points or whatever you choose. If an offer is not accepted, generally the check is returned.
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