Q: What is earnest money, and what does it mean when buying a home?
A: If you have ever bought a house you have heard the term “earnest money.” If not, it is a term you will hear in your first offer to purchase real estate. Earnest money is the action by a buyer and is the first offering of a monetary amount in the offer process. This is the amount of the money offered by the buyer as a good faith effort to secure the purchase offer and is something the seller considers an important consideration of the sale.
Earnest money is not the down payment for a property purchase, so don’t confuse the two. The down payment is usually a set amount determined by the mortgage lender. Earnest money is an amount of monetary consideration to let the seller know how serious you are as a buyer about the property purchase and the offer you are presenting. While some buyers are $5,000 serious, other buyers might be $500 serious when making an offer.
It’s all up to the buyer to determine the amount of earnest money to be tendered when making an offer to purchase a property. There is no pre-determined or customary amount of earnest money that has to be followed. There are no legal requirements to offer any earnest money. However, the seller will look closely at each offer, usually choosing between “serious offers” based upon the amount of earnest money presented. The seller could choose to counter offer a higher amount of earnest money in considering an offer to purchase. The seller does not have to accept the earnest money amount offered. It is usually considered negotiable in any offer unless a minimum amount has been set by the seller.
The seller has to consider whether or not the prospective buyer has presented a serious amount of earnest money in their purchase offer. The seller must understand they will most likely be asked to pack up and get ready to move out at the closing. The seller incurs expenses and a considerable amount of time to get ready for this expected move as a result of the sale. The seller has to accept that if they packed up to move out (or actually moved out) that the amount of earnest money is enough to satisfy their expenses if the buyer backed out of the sale at the last minute. Also, the seller is often expected to make repairs based upon a home inspection during the inspection period of the offer. Sometimes these repairs need to be performed in any case. However, the earnest money is the amount the seller would get to compensate for completed repairs if the buyer failed to complete the sale.