Don't Call Me Earnest!

Many people want to know what earnest money is. What does it mean and what happens to it?

Earnest money is an initial “deposit” made by the buyer at the time he or she writes an offer on a property. There are really two purposes of earnest money all rolled into one big one. The first is to show or demonstrate to the seller that the buyer is in earnest in their offer, that they’re serious- the point being that the greater the amount of money, the more earnest they are in their offer. Therefore, if looking at two identical offers from two different buyers, the one with the larger amount of earnest money demonstrates higher likelihood to the seller that that particular buyer will close on the contract.  The second purpose of earnest money is to possibly provide the seller with funds that the seller can collect of the buyer defaults on a contract.

Earnest money is deposited in the escrow account of whoever the escrow agent is, usually the selling broker. The funds are held in this escrow account until it’s time for closing, when the escrow agent (again, usually the selling broker) writes a check to the title company. Or, if a contract doesn’t close, the funds are paid as directed by a release form to the contract. 

In cases where the buyer and the seller cannot agree who gets the earnest money, then the money is held for a period of time before being sent to the State Treasurer’s department. They are held there until either the parties agree, or the funds simply become property of the state.

As to whether or not the amount of earnest money- or earnest money at all- show that a buyer is in earnest or not, we can’t really argue. But for the most part, if the amount of earnest money is not such to cause somebody to seriously contemplate as to whether or not they will default on a contract or not, it is, in general, somewhat of an anachronism. Earnest money is, therefore, not required for a contract.

For more information on buying your first home, click here.  Or, simply call or text us at 417.872.9222.