Your Complete Guide To Earnest Money Deposits

Are you currently in the midst of buying or selling a property? If so, you might have heard about “earnest money.” 

No, it’s not the latest cryptocurrency, nor is it a new dance craze. In fact, the earnest money deposit is a crucial part of the real estate process that you don’t want to overlook.

What's in this article?

What is earnest money?
Can earnest money be refunded?
Tips for protecting your earnest money
Final words on earnest money

Think of it as a security deposit to show the seller that you’re serious about buying their property. It’s a way to put your money where your mouth is, so to speak. 

But how much should you offer? When should you offer it? And what happens to your money if the deal falls through? These are just a few of the questions we’ll answer in this Complete Guide to Earnest Money. 

What is earnest money?

Earnest money is not a requirement for purchasing a home, but it plays an important role and is sometimes called a “good faith deposit.” 

Basically, earnest money refers to a type of down payment made by a buyer to show their commitment to the seller about purchasing their property. 

When a buyer and seller enter into a purchase agreement, the seller takes the home off the market while the transaction moves through the entire process to closing. Earnest money shows goodwill or expresses a buyer’s sincerity in the agreement.

It’s also a way to protect both buyers and sellers during the transaction. This money gives the buyer extra time to get proper documentation to conduct a title search, property appraisal and general inspection without the seller worrying about the deal falling through. 

Earnest money usually equals between 1% and 5% of the sale price as a deposit. However, some sellers ask for a fixed amount ranging from $5,000 to $10,000. Sometimes, the bigger the good faith deposit, the more serious the buyer is considered to be. 

The cash is held in an escrow account and managed by an attorney or title company until full payment is made.

Ready To Take Your Next Step?

Purchase - Refinance - HELOAN/HELOC(Required)
This field is for validation purposes and should be left unchanged.

Can earnest money be refunded?

What happens to the earnest money if the deal falls through? Is it refundable? The short answer is: It depends. 

In most cases, the earnest money is refundable if the buyer’s contingencies are not met. Contingencies are conditions that need to be satisfied for the sale to go through. 

Examples include a satisfactory home inspection contingency or a contingency for the buyer’s ability to obtain financing. 

Earnest money is refundable if the following events stipulated as contingencies in the contractoccur:  

  1. If you discover during the inspection that the property has significant concerns (such as structural problems or faulty fixed equipment) that are not acceptable or disclosed by the seller. If this happens, there are two options: Pull out of the deal entirely, or negotiate who pays for the repairs.
  2. If the appraised worth of a house is less than the agreed-upon purchase price, provided this contingency was agreed upon at the outset. In such a scenario, the buyer can negotiate a reduced price or back out of the transaction entirely.
  3. If the buyer cannot secure financing, again if both seller and buyer agreed to this condition. This doesn’t happen with Compass Mortgage homebuyers who participate in Get Committed® because those buyers have a loan commitment that is better than standard pre-approvals. 

However, if the buyer backs out of the sale for reasons not covered by the contingencies, the buyer may forfeit the earnest money. For example, if the buyer simply changes their mind about the purchase or fails to meet their contractual obligations, they may not be entitled to a refund. 

The terms of the earnest money deposit are typically outlined in the purchase agreement, so it’s imperative to review this document carefully before signing. If you have questions about earnest money refundability, consult with your real estate agent or an attorney.

Tips for protecting your earnest money

Protecting your earnest money has a lot to do with following up on the contract terms. Buyers can do a lot to protect their earnest money, including;

  • Using an escrow account: Do not keep earnest money with the seller for any reason. An escrow account must be where the earnest money is kept, either in an account with a legal firm, the title company handling the transaction or the real estate agency. 
  • Abide by the agreement terms: Follow the rules and regulations outlined in the agreement, and keep tabs on deadlines. For instance, if the seller states that the house inspection must be completed at a fixed date and time, you must ensure that you meet up or stand a chance of losing earnest money.
  • Document everything: The most vital part is documentation. All agreements made before the purchase should be documented because this represents a contract between the buyer and seller. Therefore, all negotiations between buyers and sellers regarding money should be included in the purchase contract. 

Final words on earnest money

Want to learn more about earnest money or the process to purchase a home? Compass Mortgage can finance your loans with our simple and personalized process. 

Get Committed® with us today and get a fully underwritten loan commitment to further show sellers that you’re serious about buying their home. For a home purchase process that’s secure and peaceful, contact Compass Mortgage and our experienced team of loan professionals today.