What is Earnest Money?

When you put in an offer for a house, you’re usually expected to put down a deposit into the escrow account that is set up for the transaction. This is called “earnest money”. This money will generally be due at the time that the offer is accepted and the sales & purchase agreement signed. If the purchase agreement is breached, you lose the earnest money. You'll often have help from your escrow company to manage the transaction, but we’ll give you the answers you need to understand how to approach structuring and securing the deposit.

Depositing the earnest money

In your offer letter, you have the ability to specify how much your earnest money will be. The deposit amount will usually be 1% - 3% of the purchase price. You'll generally have an escrow account opened by your title/escrow company around this time, and this is where you can deposit the earnest money. This usually needs to happen within a few days of signing the purchase agreement.

Be safe when depositing into your escrow account, as there are known escrow deposit scams. Call the escrow officer and verify the wiring instructions before executing the transaction, and make sure you're workng with a trusted party.

Can I get the earnest money back if I want to back out?

Yes, but generally only if a contingency, which you should have specified when putting in your offer, is triggered (more on contingencies here). A few examples of scenarios where a contingency enables an earnest money deposit refund:

  • Inspection contingency: You get the house inspected and are not satisfied with something in the report.
  • Title contingency: You get a report on claims to the title of the house and find a suspicious thread of ownership history.
  • Appraisal contingency: The house gets appraised and the house value doesn’t match your offer price, meaning you have to pay more out of pocket for the mortgage.
  • Loan contingency: You're not able to get a final approval on the loan you need to purchase the house.

Each of these contingencies has a due date, which means you have to release these contingencies by the specified date. If the contingency is released and an issue comes up after the fact, you won't be able to use the contingency to back out of your contract while getting your earnest money back.

Could I lose the earnest money?

If you have passed the deadlines for releasing a contingency, the seller can start taking action to coerce you into completing the purchase, or forfeit the earnest money. In some rare cases it is also possible for a seller to sue you if you back out for an invalid reason, and coerce you into completing the purchase.

Your contingencies are there to protect you, so don’t waive them too early, and beware the risk you are taking on if you forgo a contingency in your offer to make it more appealing. Make sure to do your due diligence during the contingency period and don’t release them until you are absolutely certain, and you’ll be protecting your interests.

How does the earnest money payment go towards the purchase?

The earnest money goes towards the cash you are putting down on the property. At closing, your remaining payment into the escrow account will be all the closing costs and downpayment minus the earnest money you have already paid.

Questions? Requests? Contact us at team@usebramble.com.

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