FAQs on the Earnest Money Deposit

Here are some common questions buyers ask regarding the Earnest Money Deposit…

Q: What is “earnest money”?

A: Earnest money is money paid by the buyer at the time an official offer is submitted to the seller. It is intended to demonstrate the good faith of the buyer to complete the purchase. Earnest money is applied towards the purchase price, however, it may be forfeited if the buyer fails to complete the purchase under the terms of the sales contract.

Q: Do I have to pay an earnest money deposit to have a valid contract?

A: Although no law requires it, sellers typically do require it. If you agree to pay earnest money but do not make the required payments or your earnest money check “bounces,” you will probably be considered in breach of the contract.

Q: How much earnest money should I pay?

A: The amount is negotiated between the buyer and the seller. It is typically a small percentage of the purchase price and can vary depending upon local market conditions, the price of the property, the type of property (e.g. vacant land, existing housing, or new construction), whether cash advances to builder or seller are involved, and other factors. In the DMV market, it is typically between 3-5% of the purchase price. 

Q: Will my earnest money earn interest between the contract and closing?

A: It depends. Most earnest money is held by a title and settlement company chosen by the buyer in a non-interest-bearing trust or escrow account. In order for the money to earn interest, the buyer must make that selection in the contract.

Q: Who can hold earnest money?

A: Any person (or entity) agreeable to the buyer and the seller, but usually a licensed real estate broker or title company. As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close (due to the seller’s death, divorce, bankruptcy, judgment liens, receivership, fraud, tax liens, title problems, etc.). Consequently, most buyers prefer to have title companies hold the earnest money deposit. Since they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used.

Hope these are helpful and if you are in the market to buy a home I would love to connect with you and see how I can help.