Buying a home can be stressful, even more so when you aren’t quite sure when the money is due during the process. In this blog, I will break down what earnest money is and the role that it plays when you are buying a home. You will be better prepared and less anxious when the time comes to submit a winning offer on a house.
What IS Earnest Money?
Earnest money is the “good faith” money that you will submit to a seller after your offer is accepted. Think of it as an early deposit on the home. It’s NOT additional money that the seller gets to keep on top of the price you are offering. The amount that you offer as earnest money will be held on to by most often the seller’s broker until closing day. It will then be paid towards your down payment and closing fees.
Why is it important?
Earnest money is important to a seller because it shows that you have "skin in the game." It can be very risky for a seller to take their home off the market if a buyer is not actually serious about purchasing. Think about it, if you are house hunting and see a home come back on the market AFTER they had an accepted offer, what is one of the first things that you think?... "What’s wrong with it." This can end up very costly for a seller, which is why they may be apprehensive to accept an offer with a very low earnest money amount.
Average Amount
Typically you will see buyers offer 1% of the purchase price of the home as their earnest money. So for a $350,000 house you would offer $3,500 in earnest money. But you are allowed to offer as much or as little in earnest money as you’d like. I have seen buyers do as much as up to $15,000.
Is Earnest Money Refundable?
You are most likely wondering though if that amount is refundable should something go wrong during the buying process… That depends. Mostly on what contingencies you have built into your offer. The most common ones you will see in Minnesota are:
- Home inspection contingency
- Mortgage financing contingency
After your offer is accepted on a home, you will likely have a home inspection. Should you find any major issues or required repairs that a seller is not willing to fix or deduct from the price, you are able to cancel the offer and get your earnest money back (IF your offer was contingent on home inspection). You are likely going to have a mortgage on the property that you are buying as well. Depending on the terms in your offer, if your financing was to fall through during the transaction, you would also likely get your money back.
You are protected in a lot of ways with contingencies built into a contract, but you will NOT get your earnest money back should you get cold feet or find a better home and choose to walk away. This is where it shows you have skin in the game.
That being said, you are also able to mark your earnest money as non-refundable in your offer to a seller, no matter what. This is a technique that we see used in VERY competitive markets in order to win in multiple offer scenarios.
When is the money due?
Earnest money is due after you have an accepted offer on a property. In the state of Minnesota, your broker/ agent must have the money deposited within three days of your final purchase agreement acceptance date. Most often buyers will submit this money the same day they receive the news that their offer was accepted. How this money is submitted can be different for each transaction, but you will typically see it as a check or via a secured payment link online.
