When Do You Pay Earnest Money in a Home Purchase?

When purchasing a home, buyers encounter various financial components. Earnest money is one such deposit that plays a significant role in demonstrating a buyer’s commitment to a real estate agreement. This financial commitment helps assure sellers of the buyer’s serious intent to proceed with the home purchase.

Understanding Earnest Money

Earnest money, often called a good faith deposit, is a sum of money a buyer provides to show genuine interest in buying a property. It acts as a signal of seriousness from the buyer and provides a degree of security for the seller, indicating that the buyer is committed to the purchase agreement. If the deal proceeds as planned, this deposit typically contributes to the buyer’s down payment or closing costs.

The amount is usually a percentage of the home’s sale price, commonly 1% to 3%. This can vary based on local market conditions, sometimes increasing to 5% or 10% in competitive markets. While often a percentage, some sellers might prefer a fixed amount, such as $5,000 or $10,000, as part of negotiations.

The Timeline of Earnest Money Payment

Earnest money is typically paid after a buyer’s offer is accepted and the purchase agreement is signed by both parties. This timing is crucial as it formalizes the buyer’s commitment following the mutual agreement on the terms of the sale. The exact timeframe for submission is specified within the purchase contract.

Buyers typically submit this deposit within one to five business days after contract execution. Common methods for paying earnest money include wire transfers, personal checks, or certified checks. It is important that funds are readily accessible to avoid delays that could impact the offer’s validity.

Earnest Money Handling and Disbursement

Once paid, earnest money is not given directly to the seller but is held by a neutral third party in an escrow account. This third party can be a title company, an escrow agent, or a real estate broker’s trust account. Holding the funds in escrow ensures their safekeeping and provides an impartial custodian until the transaction closes or a resolution is reached.

Upon successful closing, the earnest money is typically applied as a credit toward the buyer’s down payment or closing costs. This reduces the amount the buyer needs to bring to the closing table. If the transaction does not close, the fate of the earnest money depends on the terms outlined in the purchase agreement and any contingencies.

Buyers may receive a refund if the sale falls through due to specific contingencies, such as issues from a home inspection, a low appraisal, or financing falling through. Conversely, if a buyer backs out for reasons not covered by a contractual contingency, they may forfeit the earnest money to the seller. The contract specifies the conditions under which the earnest money is refundable or forfeited, emphasizing the importance of understanding these terms.