What’s Earnest Money and Why Do I Need It?

Earnest Money(1)What’s Earnest Money?

What is earnest money and why do I have to pay it? Definitely a common question I am asked in the course of writing an offer on a property for sale.

Home buyers who’ve been through the process before are familiar with the concept, but for those who haven’t purchased for a long while, if ever, the question comes up.

Another way to look at putting up Earnest Money when making an offer on a house is to think of it as a deposit.

Think about if you stopped by a garage sale on your way home from work and there was the bike you’ve been dying to have….and the price was right!

You make a deal with the owner, but as you reach in your wallet, you realize you don’t have all the cash on hand to pay the owner right then and there.

So, you give the owner a few bucks to “hold” the bike and not sell it to anyone else while you run home (or to the bank) and get the balance of the payment.

If you never come back, the seller will likely keep your money and resell the bike.

It’s no different when making an offer on a house to sell. In essence, as a buyer, you’re asking the seller to take their house off the market and not show it while you get your loan in order to pay them at closing. This process can take 30-60 days. What if get cold feet? Or buyer’s remorse?  Then the sellers could make a claim on your Earnest Money.

Of course most offers are made with contingencies in place….subject to a home inspection and to you getting your loan, so there’s little risk of losing your Earnest Money deposit unless you don’t perform. So, as I explain to the buyers I work with, if you do your home inspection, get your loan, and decide at the last minute you just don’t want to buy, then you’re likely to lose that deposit.

It’s important to remember a purchase contract with a seller is exactly that….a contract. Make sure you understand the process and all the “what-if’s” before signing on the dotted line.

Which seems only fair.