When Do You Put Down Earnest Money?

Earnest money serves as a demonstration of a buyer’s serious intent to purchase a property within a real estate transaction. This financial commitment signals to the seller that the buyer is genuinely interested in moving forward with the acquisition. It helps to establish a foundational trust between the parties, setting the stage for the complex process of homebuying.

What is Earnest Money

Earnest money is a deposit made by a buyer to a seller, signifying a good-faith intention to complete a purchase. This sum is typically held by a neutral third party, not directly by the seller, to ensure its security. For the buyer, it demonstrates commitment to the offer and to secure the property while due diligence are performed. It provides the buyer with time to arrange financing, conduct inspections, and complete other necessary steps before finalizing the purchase.

From the seller’s perspective, earnest money offers security against a buyer withdrawing without cause, compensating them for the time the home is off the market. If a buyer backs out for reasons not stipulated in the contract, the seller may keep the deposit as compensation. The amount of earnest money typically ranges from 1% to 3% of the home’s purchase price, though it can sometimes be higher, reaching 5% or 10% in highly competitive housing markets.

The specific amount can also be a fixed sum, such as $5,000 or $10,000, negotiated between the buyer and seller. Factors influencing the earnest money amount include local market customs, property value, and offer competitiveness. A larger deposit can make an offer more attractive to a seller, especially in a market with multiple interested buyers.

Timing of Earnest Money Deposit

Earnest money is generally submitted after an offer is accepted and a purchase agreement is signed. While it can occasionally be included with the initial offer, the standard practice involves its submission once the contract is mutually accepted. This ensures that a legally binding agreement is in place before the funds are transferred. The deadline for the deposit is outlined within the purchase contract.

Typically, it is due within one to three business days following the execution of the purchase agreement. In some fast-paced real estate markets, this timeframe might be as short as 24 to 48 hours after both parties accept the offer. Mutual acceptance of the purchase contract triggers the buyer to initiate the transfer of these funds.

Buyers commonly transfer earnest money via certified check, personal check, or wire transfer. It is important that these funds are directed to the designated third-party holder, such as an escrow agent or title company, rather than being paid directly to the seller. Adhering to the timeline solidifies the buyer’s commitment and allows the transaction to proceed.

Managing Earnest Money Funds

Earnest money funds are typically held by a neutral third party, such as an escrow agent, a title company, a real estate attorney, or a real estate brokerage. These funds are placed into a dedicated escrow account, which acts as a secure holding place until the transaction is finalized or terminated. This arrangement protects both parties by ensuring that neither party has direct access while the sale is pending.

At closing, if the sale proceeds, the earnest money is applied toward the buyer’s down payment or closing costs. If the earnest money deposit exceeds the total amount due at closing, any remaining balance may be refunded to the buyer. This ensures the deposit contributes to the buyer’s financial obligations in the home purchase.

Earnest money may be returned to the buyer if specific contingencies in the purchase contract are not met. Common contingencies include a satisfactory home inspection, property appraisal, or securing financing. If these conditions are not fulfilled within agreed timeframes, and the buyer adheres to the terms, the deposit is refunded.

Conversely, earnest money may be forfeited to the seller if the buyer defaults on the contract without a valid reason or fails to meet deadlines not covered by a contingency. Examples include a buyer changing their mind or missing a contractual deadline. In these instances, the seller retains the earnest money as compensation for lost time and opportunity.