What is Earnest Money?!
What is earnest money? Earnest money is essentially a good faith payment which shows the seller that you are serious about buying their home. It's also part of your down payment and get’s applied toward your cash to close at the closing table. For example. So for instance if you pay 5% in earnest money (abbreviated as EM) and your total down payment is 20% then that means you've already paid 5% of your down payment up front. So at closing you'd just pay the remaining 15% of your down payment plus your closing costs.
How much is earnest money? Typically in the Billings area there is one earnest money payment and the range can vary. For a first time home buyer purchasing a home under $500K this could look like $500 or $1,000 upfront, but can vary depending on if the seller wants to negotiate more money upfront. The first EM payment is usually due within 3 business day of both the buyers and sellers signing the contract, but can be longer depending on how your contract is written. (Standard is anywhere from 3-7 business days.)
Who holds the earnest money? Usually the earnest money is held by a title company. Some real estate brokerage representing the seller can hold the earnest money although it is rare to see that in our area. Earnest money is typically deposited the day it is received so be sure that money is in your account when you drop off the check or wire the funds.
Why do we pay earnest money? Without the requirement of earnest money, a real estate buyer could make offers on many homes, essentially taking them off the market until they decided which one they liked best. Sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.
Can I get my earnest money back if I terminate the contract? If you terminate the contract during various contingency periods, the earnest money is usually refundable. For example, one contingency that most buyers have in their contract is the home inspection contingency. This protects you and allows you to terminate the contract based on the findings during the home inspection. (There are dates that you decide when you are creating your offer, so just make sure that you are paying attention to those dates.) If you simply change your mind about buying the home, we are through all of our contingencies, and we are about a week or two out from closing it can get more tricky to get the earnest money back. That being said, if you terminate because your loan was denied, the property burned down, the property didn't appraise or because of another reason where your earnest money was protected in the contract then you'll usually get the full amount of your earnest money back.
Can I refuse to pay earnest money? You could refuse, but likely your offer won't be taking seriously and it's not something we recommend. That said, if you are doing a 0% down payment loan like a Rural Development Loan or a VA loan we may be able to negotiate to have you skip paying any earnest money since you aren't putting down any down payment.
