The buyer can put earnest money toward the down payment. It may also go toward the buyer’s closing costs. Either way, the seller wants the funds to protect themselves if the buyer walks away without a good reason.
- In some sense the earnest money payment goes towards the seller’s peace of mind
- Earnest money is due three days after a contract is executed
If the buyer does not deposit the funds in a timely manner, then
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What Does the Earnest Money Deposit go Towards?
In one sense the earnest money deposit (EMD) goes toward the seller’s peace of mind. When the homeowner agrees to the contract, they take their house off the market. They lose time and potential buyers if the deal does not go through. This deposit protects them because if the buyer fails to close then they may claim the deposit.
On the other hand, the buyer may think that is a lot of money, and I do not want to pay that for the seller’s good will. While that is a perfectly understandable question, the reality is that if the transaction closes the attorney (or title company) applies all that money to:
- Closing costs
- Down payment
How much goes to either of these depends on the agreement the two parties make. Rocket Mortgage tells us that if the deal closes the buyer is not out any more money than they agree to pay. They just pay some of it up front to show good faith to the seller that they will not back out of the deal because they get cold feet. In fact, in many places people call this a good faith deposit.
Who Keeps Earnest Money?
Who keeps the earnest money payment is an important question. Never give it directly to the seller. According to Investopedia one of three escrow agents should hold the money:
- Attorney
- Real estate broker
- Title company
Who holds the money depends on how real estate is sold in your area. The thin to remember is that a reputable, licensed third party maintains the account. Further, you should transfer the funds either by certified check or wire transfer.
What Happens to the EMD at Closing?
At closing the attorney credits the money toward the closing costs or the down payment. It shows on the closing accounting documents that both parties receive. The seller does not get a separate check related to the deposit.
In fact, the seller should never see the money directly. They do not have access to it unless the deal goes bad. Only if the buyer breeches the contract will the seller get a check for the earnest money.
When is earnest money due?
The EMD is due three business days after both parties sign the contract. This may vary depending on location. In fact, in some markets the seller may want the deposit with the contract. This brings us to two key facts:
- The law does not require them
- If the contract is properly executed, then the buyer must deposit the funds in a timely manner or be in breach of contract
These statements may seem at odds, but they really are not. There is no law saying you must put down a deposit. Market demands determine if you do and how much. However, once you agree to put down money, then a good attorney will write it into the contract. Once both parties agree and sign then it becomes binding. Always make sure you read the contract and ask any questions you may have before you sign.
Is the EMD Refundable?
The earnest money payment is refundable if a problem triggers a contract contingency. For instance, the home inspection may find a problem. Under the terms of the agreement the two parties may either negotiate a remedy or cancel the contract. If they choose the latter, then they escrow agent releases the funds back to the buyer.
It is important to know your contingencies because they are the only way you may back out of the deal and not be in breach of contract. You cannot wake up one morning and decide you do not want to buy the house anymore. If you do this, that same agent will release the funds to the seller.
What if I Do Not Have Earnest Money?
If you do not have earnest money you may still get the property. As I said before, it is not a legal requirement, anywhere. According to Property M.O.B. you have some options:
- Delay when the transfer is due until after you get the money in your account
- Offer them a small deposit, like $100 or even $10
- Walk away
This site focuses on investment properties, but you can use these principals for residential houses too. If you just need a few days to get the money into your account, then the buyer will negotiate the due date for a good contract. The second point may seem ridiculous, or even pandering, but many sellers think they should take a deposit, not matter how small. It is not the amount so much as the process. Finally, if they will not budge you have no choice but to go somewhere else.
Whether you must put down an EMD depends on the market more than anything else. If prices rise and you are in a seller’s market, then you should wait until you have enough money in the bank to offer a substantial deposit. On the other hand, if you are in a buyer’s market, then you have more leverage, especially if you make the only offer on a house.
Final Thoughts
Many buyers get upset about ponying up money right at the beginning of the process. There is a natural tendency to worry that you may never see that money again. If you feel this way you are certainly not alone.
Remember that the earnest money payment is negotiable. In some cases, you may not even need it if your contract is strong enough and the market conditions are right. For most of us buying a residential property, though, we will put a substantial amount of money down to make the seller feel good about the deal.
The thing to remember is that if you are serious about the property and you follow through on everything you need to then you will not lose the money. In fact, in more than 95% of transactions this is not an issue at all. The escrow agent holds the money safely and the attorney (or title company) puts the money towards either your closing costs or down payment.
