So What is “Earnest Money,” Anyways?


So, you probably knew when you started this whole house-buying-process-thing that you wouldn’t be able to get out of it without putting at least SOME money in. We like to talk about no-down-payment and low-down-payment options, but the truth is you are going to have to have at least some funds on hand to get into that new-to-you-home. 


When you enter into a contract to buy a home, you will be required to put down what is known as “earnest money.” It’s easy to agree on a price and sign on the dotted line promising that you will buy something, but the seller wants to see you have a little skin in the game. A little bit of “good faith,” if you will. 


Earnest money amounts vary widely. You may only need to put down $500, or if you are paying cash you may need to put down 10% of the purchase price. Your agent will advise you here, but be prepared for at least $500. 


curled money


This money goes into what is known as an “escrow account.”  Don’t worry - you aren’t slipping it into the seller’s pocket. Your real estate agent’s firm or the title company will typically hold the funds (though other parties, such as the seller’s firm or an attorney, could hold it). The money will be held in this escrow account until the day you close on the property, at which time it is “credited” back to you at closing. 


A lot of people confuse earnest money with a down payment, as it is basically money you put down to hold the home. The difference - the earnest money holds the home, binds the contract, and placates the seller, while a down  payment is loan-related (i.e. if you are paying cash you won’t have a down payment but you will still have to put “down” earnest money).


If you were to change your mind and back out of the contract, this money would go to the seller as a remedy for your breaking the contract. As in, this would help soften the blow a bit. 


The caveat to that is if you have a home inspection completed (which you SHOULD) and something is discovered that causes you to need to end the contract. For example, you find that the house is sitting on a big sinkhole and will likely cave in in the next year. No one expects you to go through with that purchase - your earnest money is returned to you.


Confused yet? No worries! When we talk more I will answer all your questions. Call me any time!