Anyone who’s looked into the home buying process will have come across the term “earnest money” a few times. What is it? Simply put, it’s a “good faith” deposit that is paid once you’ve made an offer on a home. It’s intended as a way to show the seller that you’re serious about the offer. That’s because if you back out of the deal then you’ll lose this deposit. This raises the question though, what becomes of that money and do you get it back at closing? The short answer is, no, you don’t usually get it back. But there’s more to it than that. In some cases, you do get it back. Read on to learn about how earnest money works in the home buying process.
So What Exactly is Earnest Money?
Earnest money is a sum that buyers put down at the start of a home transaction. The money is put into an escrow account, often referred to as “going into escrow,” which will be held by a third party until the transaction is complete. It aims to give the seller monetary assurance that you won’t back out of the contract without valid cause. Most contracts will include contingencies that allow the buyer to walk away if certain conditions aren’t met. For instance, the inspection contingency allows buyers to back out and get their deposit back if they find the home to be in an unacceptable condition. However, if a buyer decides to back out of the deal for a cause that isn’t covered in the contingencies then they won’t get their deposit back.
Exactly how much the earnest money amount comes to varies by area, local market, and purchase amount, but is generally around 1-2% of the accepted offer price. If the market is very competitive then your Exclusive Buyer Agent might recommend that you put more money down. It has to be enough to make your offer look serious but not enough to put your finances at risk. While it may not be likely that you’ll lose it, you’ll still want to protect yourself as best you can. It’s typically made within five days of an offer being accepted by a seller. Neither you nor the seller can touch that money until the end of the sale.
What Happens To Earnest Money at Closing and Do I Get It Back?
Provided the rest of the transaction goes smoothly and you iron out any difficulties, you’ll eventually come to the closing where you’ll pay the seller and walk away with the keys. At this point, the escrow agent will withdraw your deposit from the escrow. What happens with it next depends on what sort of escrow you put down. In the majority of cases, you’ll have put money down. In this case, this amount will go towards closing costs or the down payment. But if you take out a VA or USDA loan, there is no down payment requirement. In that case, the earnest money will go towards just your closing costs. If there’s anything left over, you’ll get that surplus back.
But there are also a few cases where the deposit you made was not money. It’s rare, but sometimes a car, boat, real estate, or precious metals are used as an earnest deposit. Depending on the terms of the deal, this will be either returned to the buyer or liquidated and put towards the purchase price at closing.
So, while you usually won’t get your earnest deposit back, in some ways you do. This deposit will be going towards your down payment and closing costs. The important way to look at it is not as money lost but as an early payment on your new home.