Earnest money usually goes towards closing costs or down payment. These are the most common ways to use the funds at closing.
- It is a good faith gesture to the seller
- It may go to any expenses the buyer has if the deal closes
In most cases buyers need the funds for one of these purposes. Sometimes, though, if they have the cash, buyers may elect to get a check back at closing. They can only do this if they have enough liquid assets to cover all the other expenses related to the deal.
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What is Earnest Money in Real Estate?
Up Nest defines earnest money as “a good faith gesture” that shows a seller that a buyer is serious about their offer.” When the seller accepts this, they take the property off the market while the:
- Buyer conducts inspections
- Mortgage company completes the appraisal
- Title company completes its search
- Underwriters secure financing
This is important because the seller may lose time and potential good buyers if the deal falls through.
What is the Purpose of Earnest Money?
The purpose of earnest money is for the buyer to show good faith to the seller. Each has an issue that this deposit helps clear up:
- Buyers want time to perform home inspections, secure title insurance, and get a mortgage
- Sellers want to make sure that buyers will not get cold feet and back out of the deal
Each of these are valid concerns, and an earnest money deposit (EMD) helps both sides feel more secure about the transaction. For buyers, they can take a reasonable amount of time to make sure there are no major problems with the house. Sellers get peace of mind that if the deal falls apart for a reason other than a contract contingency they will be compensated.
Is Earnest Money Refundable?
Most real estate transactions close, and the EMD goes toward either the down payment or the closing costs. Even if the deal falls apart buyers rarely lose their money because of contract contingencies. However, Realtor.com points out three common ways you can lose your EMD:
- Wavie contingencies
- Ignore timeline
- Get cold feet
All three of these are rare, but they do happen. As an agent I always encouraged buyers not to waive contingencies, even in hot markets. However, sometimes buyers want to if they got burned before with bidding wars or they really love the house. It is a risk if something goes wrong. After all, those clauses are in the contract for a reason.
The other two should never happen, but they do. Buyers must stay on top of their obligations, and a skilled professional real estate agent will be with them every step to make sure they do. However, sometimes people make mistakes. Getting cold feet is the reason for an EMD in the first place. It is common, and this deposit is a great incentive to complete the transaction.
Does Earnest Money Go Towards Down Payment or Closing Costs?
Earnest money can go towards down payment or closing costs depending on how your contract is structured. Sometimes the seller pays the buyer’s closing costs, and then the EMD goes towards the down payment. If you cover all of your commitments with other funds, you can even request the EMD back in the form of a check.
Down Payment
When a deal closes earnest money may go towards down payment. This is quite common. If the buyer does not have a lot of cash this is an effective way to cover part, or all, of this obligation.
Closing Costs
Another use for earnest money is to cover closing costs. Buyers put the EMD toward this for the same reason. These transactions are expensive. You need thousands of dollars for the various expenses. Most people do not have that much liquid assets, so any time you can put one deposit toward another expense you should.
Final Thoughts About What Does Earnest Money Go Towards
When a buyer pays earnest money, it makes the seller more comfortable to take the house off the market. The buyer does take a small risk that they may lose the deposit if they do not fulfill their obligations. Otherwise, the money goes towards the down payment or closing costs.
You, the buyer, control how to use the money at closing. If you have the funds available to cover all your expenses, you can even ask for a check back at closing.
