Homebuying FAQs: What is Earnest Money?

When I am helping buyers find their dream home, there are a lot of questions that can come up during the process.  Terms that we Realtors use often can sound foreign to someone who hasn't purchased a home in awhile - if ever.

Once a home buyer has found the home they would like to purchase, they will write an "offer" on the Colorado Contract to Buy and Sell.  This spells out the price they are offering and the terms of their offer, and it outlines the dates and deadlines that both Buyer and Seller will need to follow before the property closes.

Once Buyer and Seller have agreed to these initial terms and both sides have signed the Contract, the home is now Under Contract.  One of the first things the Buyer will supply once this agreement has been reached is Earnest Money.  This can be a little confusing for Home Buyers unfamiliar with the process, and Earnest Money is the subject of several questions.

Here, I will answer the most common questions I get:

• How much Earnest Money will I need to provide?  A good guideline for the amount of Earnest Money a Seller will request - in the state of Colorado - is 1% of the asking price of the home.  The amount requested will usually be stated in the MLS.  It is not always 1% - it can be less, or more - and sometimes the Seller will accept less than the amount stated in the MLS.
• Why do I need to provide Earnest Money?  Once a Buyer and Seller have agreed to the initial terms, it can take 30-45 days (or sometimes longer) to do your due diligence research on the home.  During this time, the home will be listed as Under Contract in the MLS, and most of the time, other buyers will bypass it in favor of houses that they know are available.  This means the Seller is potentially losing out on other qualified Buyers.  The Seller will want to know that you are serious about the contract, and having a few thousand dollars held in escrow will show that you are willing to put some "skin" in the game!
• Does the Seller hold the money?  No.  The money is held in an escrow account, usually either at a title company or the Seller's Realtor's office.  It does not go to the Seller until the contract closes.
• What happens to the Earnest Money if we don't close?  Built into the contract are multiple opportunities to find and verify information about the home, the HOA, the property boundaries, and the loan, to name a few.  Working closely with your Realtor, you will have several chances along the way to determine whether you wish to proceed with the sale.  Should you decide that you no longer wish to close on the home due to one of these factors, your Realtor will draw up a Termination and Earnest Money Release.  The Earnest Money is released from the escrow account and returned to the Buyer.
• Is Earnest Money in addition to my Offer Price?   Earnest Money is a portion of your offer price, and it gets credited to your down payment at the time of close.
• What if the Seller decides to keep my Earnest Money?  There are very few situations in which the Seller is able to keep the Earnest Money, unless the Buyer commits a breach of the contract.  If there is any dispute over the Earnest Money, the dispute goes to mediation and a third party examines the evidence to determine whether the Earnest Money will be returned to the Buyer or awarded to the Seller.  The Seller cannot simply "decide" to keep the Earnest Money - both Buyer and Seller signatures are required on the Release of Earnest Money before it can leave the escrow account.

Questions about Earnest Money?  Call me today!  720-341-5235