Earnest Money: What Is It?

Many people aren’t given guidance on what happens throughout the home buying process. It can be daunting to learn about the process as it happens to you, mainly because there are so many moving parts and pieces to the process. And it all happens in quick succession. 

When one gets into the thick of things, the number of to-dos, fees, and professionals that get involved can feel overwhelming. Once one decides to put an offer on a house, things happen at a breakneck pace. Negotiations with the sellers can require a lot of time and effort. There’s also the home inspection,various testing, appraisal, and more.

Because both the seller and buyer are entering into a good-faith and rather long-winded process together, usually as complete strangers, the buyers will have to put up what is called “earnest money”. Sellers want to know that they’re going through this process with buyers who have serious intentions about following through with the purchase. In most cases, buyers will need to put down earnest money shortly after their offer is accepted. Typically, the earnest money is about $500-1,000.

On closing day, the earnest money fees are applied to the buyer’s closing costs. However, if for whatever reason the sale of the home falls through without good reason you will not be able to recoup the earnest money. However, if the sale of the home falls through with good reason, such as a failed home inspection and an inability to renegotiate the contract terms, the buyers may be able to get some or all of their earnest money back.

Earnest money is a sign of good faith from the buyer to the seller that they’re very serious about following through with the purchase of the home. Along with being pre-approved for a mortgage loan, earnest money can put the sellers at ease about the agreement they’re entering.