Does a Realtor Get the Earnest Money? Who Does?

Understanding Earnest Money

Earnest money is a deposit made by a homebuyer to a seller, signifying a genuine intent to complete the home purchase. It is often called a “good faith deposit” that shows the buyer’s seriousness. This deposit encourages the seller to take the property off the market, indicating their agreement to proceed with that specific buyer’s offer. While not legally required, it is a customary practice that can make an offer more attractive, particularly in competitive housing markets.

The amount of earnest money is often a negotiated term within the purchase agreement. Typically, it ranges from 1% to 3% of the home’s purchase price, though in highly competitive markets, buyers might offer higher percentages, sometimes up to 5% or even 10%, to strengthen their bid. For instance, on a $400,000 home, a 2% earnest money deposit would amount to $8,000.

Custodians of Earnest Money

Real estate agents typically do not hold earnest money deposits themselves. Instead, these funds are held by a neutral third party in a secure escrow account. Common entities designated to hold earnest money include title companies, escrow companies, or real estate attorneys. This arrangement protects both the buyer and the seller by ensuring the funds are managed impartially and disbursed only according to the terms of the purchase agreement.

An escrow account acts as a secure holding place for money and documents related to a real estate transaction. The third-party escrow agent has a fiduciary responsibility to safeguard the funds and release them only when specific conditions outlined in the contract are met. This separation of funds from either the buyer or seller prevents potential disputes or misuse, ensuring that the deposit is applied correctly or returned as specified in the agreement. For instance, if the earnest funds in an escrow account earn interest exceeding a certain threshold, such as $600, the buyer may be required to complete an IRS Form W-9 to receive the interest.

Earnest Money in Real Estate Transactions

Earnest money is typically paid after the seller accepts the buyer’s offer and the purchase agreement is signed, often within one to three business days. The funds are usually transferred via certified check, personal check, or wire transfer directly into the designated escrow account. Once deposited, the money remains in escrow throughout the transaction period, providing both parties with assurance as the deal progresses.

If the real estate transaction successfully closes, the earnest money deposit is typically applied towards the buyer’s down payment or closing costs. This means the initial deposit contributes directly to the buyer’s financial obligations at settlement, effectively reducing the amount of cash needed at closing. The credit for the earnest money will be reflected on the closing disclosure document.

However, there are specific scenarios where earnest money may be forfeited by the buyer or returned. A buyer might forfeit the earnest money if they back out of the purchase for reasons not covered by a contingency in the contract, such as simply changing their mind or failing to meet specified deadlines. For example, if a buyer waives a financing contingency and then fails to secure a loan, they could lose their deposit.

Conversely, earnest money is generally returned to the buyer if the deal falls through due to an unmet contingency outlined in the purchase agreement. Common contingencies that protect a buyer’s earnest money include financing, home inspection, and appraisal. If a home inspection reveals significant issues that the seller refuses to address, or if the property appraises for less than the agreed-upon price, the buyer can often withdraw from the contract and receive their earnest money back. Similarly, if the buyer is unable to secure financing despite good faith efforts, or if the seller defaults on their obligations, the earnest money is typically refundable.