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Everything you need to know about Earnest Money


What is Earnest Money, how much is it, Ways to lose it and Ways to get it back, I’m breaking it all down for you today.


First, you need to have Earnest Money in your banking account ready to go before you even start shopping for a home. This way, when you find a home you love and are ready to place an offer, your agent will ask you about earnest money so you want to be ready with funds in your account good to go so your not losing time by transferring things around.


On the offer that your agent prepares for you and you sign to send to the sellers, just under the offer price is the section about your Earnest Money Deposit. An Earnest Money Deposit (in Real Estate) is the same as a good faith deposit – this deposit that you pay up front will serve as a place holder until all the terms of the contract have been completed.


Remember when you rented an apartment, you made a deposit on the apartment and if you completed all the terms in the lease agreement (made your payments, didn’t damage anything and returned it back the way you received it), when you moved out and if all of these terms were met, you would receive your deposit back.


The same concept goes in a real estate contract, except instead of a six month to year lease on holding your deposit with an apartment, the terms that you would be required to meet in the Real Estate contact are from the day you have your offer accepted and are under contract until your closing day (which is typically 30-45 days).


How much is Earnest Money? Unlike the deposit you placed on the apartment, where someone told you exactly how much deposit to give, with the real estate offer, there is not a “right or wrong” answer as to how much earnest money deposit you should put down. In fact, here in Georgia an Earnest Money deposit is not required at all, however this earnest money is a very important key in letting the seller know how interested you really are in purchasing their home.


An exception to this would be new construction homes, if you’re looking at a newly built home and a builder is the seller – most builders will have a set deposit amount and may require additional deposits if your adding upgrades and making it more custom to what you want in the home.


But let’s continue as we are looking at a resell home and buying from a seller who is not a builder.


Think of it like this, when you send in an offer to the seller, you are asking them to take their home off of the market, and go under contract with you in order for you to get your financing in order and do all of your inspections and other things you need to do to complete the purchase of their house.


The stronger your Earnest Money deposit is shows two things, #1 it lets the seller know how confident you feel that you will actually purchase this house, #2 it lets the seller know that you’re so confident you will purchase their home, that if you don’t abide by the terms of the agreement, you will forfeit this deposit to them and they keep it.


An example of this would be - let’s say you offer to give the seller the exact sales price they are asking of $200,000 but you only put in a $10 deposit down, odds are they are not going to accept that offer because you don't seem too confident. Depending on your market, the traditional amount your agent may suggest that you make as an earnest money deposit will be between .5% - 2% of the offer price, so if your offering $200,000 on a house, you would be looking at $1,000 - $4,000 for your deposit. My suggestion is this, if the property has been on the market a while, and no other offers are on the table, you may shoot for the lower side of $1,000, but if it’s a brand new listing and the perfect home for you and your family, and you know many offers are going to be made, you may shoot for the higher side of $4,000 to make your offer stand out.


When is the Earnest Money due? I usually suggest to my clients to pay the Earnest Money after your offer has been accepted but some may want to get the Earnest Money before placing the offer and send a copy of the EM check with their offer. This is really up to you and what your comfortable doing, but honestly, I don’t feel when you pay is as important as to the amount you pay.


In the offer, next to the amount of your deposit, there is a date as to when you will pay it (from the acceptance date). For example, let’s say you place that offer on January 1st that you will pay $1,000 Earnest Money deposit within 2 days after seller acceptance, and the seller accepts it on January 2nd, then you will have until January 4th to pay it.


Who do I pay the Earnest Money to? Your deposit is traditionally paid to an impartial 3rd party. For example, the sellers’ broker, or your agents’ broker, the title company or closing attorney (if they are not the same). That 3rd party will hold your deposit in an escrow account until the contract has been completed and all the terms and contingencies have been met. The buyer nor the seller would traditionally be the holder of the Earnest Money in the event there is a breach of the agreement and the deposit needs to be paid out due to a termination of the contract.


How can you get the Earnest Money back?

There are several ways throughout the time in the agreement you can get your Earnest Money back and the #1 way is to complete the terms of the contract and buy the house. You will then get it back at closing. At closing, you sign the rest of your loan and title documents and get your keys. Let’s say for example your lender says you will have to bring $1,500 in closing cost at closing and your Earnest Money deposit was $1,000, this would leave you to bring the difference of $500 to closing.


The second most common way to receive your EM back, is you terminate the contract during your contingency time frames.


One of these contingencies, is known as your due diligence. The common time frame for the due diligence is 7-10 days from the day the seller accepts your offer and you’re under contract. During the due diligence, this is a time for you to discover everything about the house that helps you confirm this is the home for you and your family. You can check out the area schools, neighborhood, and have a home inspection. Let’s say, you have a 7 day due diligence contingency and on the 5th day you receive the results of the inspection back and the results show the home has more issues than you want to take on, you can terminate the contract and receive your Earnest Money back.


Other contingencies are the appraisal and financing contingency. These two contingencies typically have a longer time frame in your contract, such as 15-25 days after the seller has accepted your offer and you’re under contract.


The appraisal contingency gives you time to confirm the house appraises for what you agreed to purchase it for. The financing contingency means your lender has 100% approved your loan and you have met all their requirements. The same as the due diligence, if there are any issues on either of these contingencies and you terminate the agreement before these dates expire, you will receive your Earnest money back.


Ways to lose your Earnest Money.

There are a few ways to lose your Earnest Money and forfeit it to the seller. However, your agent should notify you and keep you on track for all the dates and “things to do” during the contract to best protect you and your money and help you understand what stage of the contract you are in.


The first and most common way to lose your deposit, if you wait one day after any of the contingency time frames to terminate the agreement. For example, back on that 7 day due diligence contingency time frame, if you find back inspection results on day 8 and terminate the agreement - you will NOT receive your Earnest Money back.


Second way, if you simply breach the agreement - for example, you don’t show up to closing or back out of the agreement all together.


In any of these cases, the seller would receive your Earnest Money deposit as what is called “liquidated damages” for keeping their home off the market to other potential buyers. With the terminated agreement, the seller is free to put the home back on the market to other buyers and you are then free to shop for another home, place an offer and restart the process.

Final Note, your Earnest Money cannot be a gift, meaning you can’t have your mom, brother or sister lend you this money to “help you out”, the Earnest Money needs to come from your banking account. 99% of the time, your lender WILL check this by requesting a bank statement from you showing the money cleared your account. This lets the lender know your serious in making this commitment and that you have put up your own money as a deposit and intend to meet all the contingencies in the agreement to the best of your abilities.


Final Thoughts

Hopefully, this helped you answer all of your questions about Earnest Money! My goal is to help you achieve all of your goals in life & in real estate. Be sure to check out my other blogs and resources to help you, or please share this content with someone if you think it could help them. Until the next one, stay blessed!
 

Melissa English is a Real Estate Agent and Investor in the North Georgia market with hundreds of closed transactions and nearly a decade of experience in real estate. She is also the founder of GeorgiaKey.com - a real estate investing company that specializes in purchasing property offering quick closings in as-is condition.


 

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