What is earnest money?
Earnest money is an upfront payment a buyer puts down at the time of having a binding real estate contract. Earnest money shows the seller that the buyer is making a good-faith effort to purchase the property. An earnest money deposit is applied towards the purchase price on behalf of the buyer at the time of closing.
Why do buyers pay earnest money?
When a seller accepts a buyer’s contract, the seller takes their home off the market. If the deal falls through, the seller has to start all over again, which could result in a big financial hit. Earnest money protects the seller if the buyer backs out or fails to fulfill their contingencies by the contingency deadlines.
How much earnest money does a buyer need to pay?
Earnest money in our market is typically around 1% – 2% of the sale price and is held in an escrow account, and applied towards the purchase. More earnest money can show a seller a buyer is more committed to closing, but it also is a greater risk if the buyer fails to perform according to the contract, because the buyer can lose their earnest money.
How is earnest money disbursed?
Most often, the earnest money is applied towards the purchase at closing, but it can also be disbursed with a written agreement from the buyer and seller, or per the contract terms in the case of a dispute over who is entitled to the earnest money when a contract is terminated.
What contingencies protect a buyer’s earnest money?
Due Diligence Contingency
During an agreed upon number of days as stated in the contract, called the Due Diligence period, the buyer may back out for any reason at all, and get a refund of their earnest money. During this due diligence period, the buyer will typically do general inspections, such as a home inspection or a review of Homeowner’s Association (HOA) documents, or specific inspections like for a septic, well, radon, or mold. Buyers can negotiate repairs or financial concessions during due diligence via an amendment to the contract.
The appraisal contingency protects the buyer if the property value is appraised for less than the purchase price. The lender hires a third-party appraiser to determine the fair market value of the home and to compare it to similar properties for sale. With this contingency, if the home is appraised at less than the sale price, the buyer can choose not to move forward with the purchase, and get their earnest money back. Or the buyer can negotiate the price with the seller if they want to move forward with the purchase, despite the appraisal. Each appraisal contingency varies based on the loan type (FHA, VA, USDA, Conventional) and contingency terms.
A mortgage contingency protects the buyer to make sure they can afford the home and qualify for the loan. The buyer can terminate the contract and get their earnest money back as long as this contingency was listed in the agreement and all terms of the contingency were followed.
Contingency For Selling An Existing Home
Some contracts also include a contingency for selling or closing on the sale of a buyer’s current home. These terms vary widely so a buyer should make sure they understand the terms and conditions and whether their earnest money is at risk.
If a sale is terminated, who gets the earnest money?
If the deal falls through, the buyer and seller must both sign to release the earnest money in a form called a termination and release agreement. Earnest money is required to be disbursed per a written agreement by the buyer and seller, or per the contract if the buyer and seller cannot agree. The terms of how earnest money is disbursed is regulated by the contract terms and state law.
Whether the buyer gets their earnest money back will depend on why the contract terminated and whether the buyer was within the terms of the contract to terminate.
How long does it take to get a refund of earnest money?
Path & Post’s policy on refunds of earnest money requires the money has been in the brokerage trust account for 10 days after being deposited, to ensure no fraud or issues with the deposit. Disbursement of earnest money will be no earlier than 10 days after deposit to ensure the deposit has cleared the Path & Post Trust Account.
If a buyer is planning to find another property, it is best to have Path & Post retain the buyer’s earnest money in the brokerage trust account to apply to the next purchase.