Let’s Discuss Earnest Money

Earnest money is an amount of money that a buyer submits when an offer to purchase is accepted by a seller to demonstrate the buyer’s good faith and intention to complete the transaction. Once the purchase agreement has been accepted, the earnest money is due immediately after; two days or less in MN and in WI it will depend on how the offer is written.

How much is earnest money? The amount is usually 1%-2 % of the sale price or a fixed amount. It will depend in part on whether it is a buyer’s or seller’s market and what the demand for the property is. More earnest money shows you are more serious. If you love the home and want to do everything in your power to get your offer accepted, put down as much as you can afford upfront.

What happens to the earnest money after you pay? It is held in an escrow account until the closing day when it is applied to the balance the buyer owes to purchase the property. Earnest money is just paying more of the down payment and closing costs upfront.

Why do I need to pay earnest money now? Because it shows you are serious. If you back out because you change your mind, it is a way to compensate the seller for their losses and time taking their property off the market. Without paying earnest money upfront, some buyers could be putting in offers on multiple properties and backing out of the ones they don’t want before closing.

What if the deal falls apart? Depending on your offer and the terms therein, earnest money can be refundable or non-refundable depending on some common (and not so common) scenarios. Your purchase agreement determines whether you can get the earnest money back should someone back out. Here are some common contingencies that can be negotiated into your agreement to protect your funds as a buyer.

  • Financing Contingency – A financing contingency ensures that the earnest money is refundable and the buyer can get out of the transaction if they cannot get financing. Remember, a pre-approval letter does not guarantee that a borrower can get a loan at mortgage rates they can afford.
  • Inspection Contingency – A house may look great on the surface, but when an inspection is performed, it can reveal a lot of problems and issues. Sometimes, these problems are more than the buyer wants to deal with. The inspection contingency states that if an inspection reveals lots of problems with a home that can’t be easily fixed without large expense or effort. 
  • Appraisal Contingency – In this case, the buyer can back out of the contract if the home appraiser values the home lower than the mortgage.
  • Sale of Buyer’s Property Contingency – If the buyer must sell in order to buy a new home, this contingency will protect the buyer’s earnest money in the event that the buyer’s home is not sold in time.

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