What is Earnest Money?
Earnest money is a deposit paid by a home buyer when entering into a home purchase agreement. Earnest money is typically around 1% or 2% of the home purchase price. By depositing this earnest money, the buyer is showing a good faith intent to purchase the property. The earnest money usually goes to an escrow agent (a neutral third party), who holds the money until the transaction closes.
Who gets the earnest money? If the transaction closes, the earnest money is credited towards the home purchase (i.e. it will be applied towards the closing costs and/or the down payment). If the transaction does not close, the general rule is that the seller keeps the earnest money if the buyer terminates the transaction, and the earnest money is returned to the buyer if the seller terminates the transaction. However, the terms of the contract may create certain exceptions to this general rule. For example, most contracts say the earnest money is refunded to the buyer if the buyer exercises the right to terminate during the option period.
Does the buyer get the earnest money back if the loan falls through? The contract should address this as well. If the contract is subject to the buyer obtaining financing, the earnest money will be refunded to the buyer in the event the buyer’s loan is not approved. However, if the contract is NOT subject to the buyer obtaining financing, the buyer forfeits the earnest money if the loan is not approved. This illustrates the importance of thoroughly reading a contract before signing it.