What Does Earnest Money Mean

When a purchase agreement is signed between a buyer and a seller, the buyer is asked for some amount of money to be paid up front. This amount will be placed in a trust account. This deposit is known as “earnest money.”

The buyer and seller can negotiate the actual amount of earnest money. The amount may differ among contracts. It could be as low as $500 or possibly as high as
10% of the purchase price.

Earnest money amounts can be affected by several conditions:

Market conditions: Stronger markets often call for more earnest money
Buyer economics: First-time buyers often give less earnest money
Seller psychology: Skeptical sellers often ask for more earnest money

It really doesn’t matter how much or how little earnest money is provided. This fund transfer is
a “good faith” action to confirm that the buyer wants to complete the home purchase.

To this end, earnest money can be forfeited if the buyer later “backs out” of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent. This is because most purchase contracts are written with buyer-focused “outs” called “contingencies”.

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When the contingencies are met, the earnest money is applied to the amount that the buyer will be responsible to provide at settlement. For example, if the buyer
owes $55,000 at closing, the amount will be $55,000 less the earnest money.

You will want to make sure your earnest money is saved. Speak to your real estate agent/attorney before signing any purchase agreement. They can help you understand
the variations in earnest money among states, cities, and towns.