Both the Buyer and the Seller are not always clear on what Earnest Money is in the real estate transaction.

Here’s a quick overview:

WHAT IT IS?
Earnest Money is a deposit by the Buyer that is offered at the time of the offer.

HOW MUCH?
Earnest Money is typically 1% of the sales price, but can be significantly more or less depending on the situation. A quick closing may need less cash, a longer closing more. This is also a great way to show strength in a low offer as it shows a strong financial position of the buyer and confidence in the transaction.

WHERE IT GOES?
Upon acceptance of the offer, the money is deposited into the listing broker’s trust account where it is kept until closing or until cancellation of the Purchase Agreement. At closing, the money is credited back to the Buyer on the HUD-1 Settlement Statement..

ITS PURPOSE?
Earnest Money is used to assure the Seller that the Buyer is serious about consumating the transaction and gives them consideration in the event that the Buyer does not complete the transaction, assuming that they did not cancel for reasons permitted in the Purchase Agreement.

CAN A BUYER LOSE IT?
If a Buyer cancels the offer due to problems from their inspection or from failure to secure financing, they almost always have their Earnest Money returned. If the buyer backs out of the tranaction because of cold feet or they found another home they like better, they will probably forfeit the Earnest Money to the Seller. The Seller is awarded the Earnest Money for damages - in good faith they removed their home from the market and promised to sell their home to the Buyer. When the Buyer walks away from the transaction, the Seller will have to start from the beginning and put their home back on the market. The Seller has lost valuable marketing time while the Buyer was planning to purchase their home.