Earnest Money | How it works when buying a home

If you back out of the deal for a reason not outlined in the purchase agreement, the sellers may be able to keep the earnest money. However, if the deal goes through as planned, the earnest money is applied to the home purchase and becomes part of the down payment

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Why pay earnest money when buying a home?

There are a few reasons why you pay earnest money when purchasing a home:

• Demonstrate to the sellers that you're serious about buying the property.
• Show the seller that you're financially capable of following through with the purchase.
• Provide a financial stake in the transaction and help ensure that you don't back out of the deal unnecessarily.
• Create a record of your good faith in the transaction.

Overall, earnest money helps create a sense of commitment and trust between you and the sellers, which can be crucial in ensuring your home purchase's smooth and successful completion.

How much is earnest money?

The earnest money you pay when purchasing a home can vary widely. Some home buyers pay as little as $500, while others pay several thousand dollars. The amount is negotiable between you and the sellers. It can depend on various factors, including the price of the home, the strength of the local real estate market, and your financial situation.

As a general rule, the earnest money deposit should be enough to show the seller that you're serious about purchasing the house, but it shouldn't be so large that it puts a strain on your finances. In most cases, earnest money deposits are a small percentage of the home's purchase price, typically ranging from 1% to 3%.

(Click here to see it on page two of the Loan Estimate)

However, the sellers may view a larger deposit as a stronger show of commitment and good faith on your part. A larger deposit can be significant in a competitive real estate market when multiple buyers are interested in the same property. 

Where is earnest money on the sales contract?

Earnest money is part of the real estate contract. For example, in the Chicago Association of Realtors Real Estate Purchase and Sale Contract, the earnest money is in section #4. 

Check out our Sales Contract Explainer.

Earnest Money. Upon Buyer's & Seller's execution of this Contract, Buyer shall deposit with ____________________ ("Escrowee"), initial earnest money in the amount of $____________________, in the form of ____________________ ("Initial Earnest Money"). The Initial Earnest Money shall be returned, and this Contract shall be of no force or effect if this Contract is not accepted by the seller on or before ____________________, 20___. The Initial Earnest Money shall be increased to (check one) ______% [percent] of the Purchase Price, OR a total of $ ____________________ ("Final Earnest Money") within ______ Business Days after the conclusion of the Attorney Approval Period (as established in Paragraph 14 of this Contract) (the Initial and Final Earnest Money are together referred to as the "Earnest Money"). The Parties acknowledge and agree that (i) the Parties shall execute all necessary documents concerning the Earnest Money in form and content mutually agreed upon between the Parties and (ii) except as otherwise agreed, the buyer shall pay all expenses incurred in opening an escrow account for the Earnest Money.

When do I pay the seller earnest money?

Pay the earnest money after you and the seller negotiate the terms of the sale and sign a real estate sales contract. The sales contract is a legally binding document that outlines the terms and conditions of the deal, including the price of the home, any contingencies, and the closing date. 

Expect to pay earnest money when you sign the sales contract or shortly after. 

Who do I pay the earnest money to?

Usually, buyers pay earnest money to a third party, such as a title company or escrow agent, to hold in until closing. Depositing the money with an independent party helps to ensure that the funds are kept in a secure, neutral location until they are needed. 

When you're ready to pay the earnest money, follow the instructions provided in the sales contract. The instructions may involve writing a check or making a wire transfer to the designated escrow agent.

In and around Chicago, you pay earnest money after signing the real estate sales contract. Most buyers make a personal check payable to the selling agent's real estate company. Give the check to your agent, who delivers it to the selling agent's company. They hold it in escrow for safekeeping.

On the other hand, in Florida, you give the earnest money to the title company handling the closing.

Sellers don't receive your earnest money directly. Instead, the title company or settlement agent applied it towards the home's purchase at closing.

Does earnest money go toward down payment?

Does the lender verify the earnest money deposit?

Your lender must verify the earnest money deposit. To do this, the lender requires copies of the sales contract outlining the terms of the deposit, the earnest money check, and your bank statement verifying the source of the funds. 

Who keeps earnest money if the deal falls through?

If the deal falls through, the fate of the earnest money depends on the circumstances and the terms for returning earnest money outlined in the sales contract. 

Usually, you get your earnest money back when it's not your fault the deal fell through, like the home failing the inspection. But, on the other hand, if you back out for no reason, the seller may be able to keep the earnest money. 

Again, the sales contract outlines the specific circumstances under which the seller may retain the earnest money. You should carefully review the purchase agreement with an attorney or an experienced real estate agent to understand your rights and obligations as a buyer before paying the earnest money. 

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