FAQ #5 for Buyers: What is Earnest Money?

Real Estate Agent with Cedar Rapids/Iowa City, IA KW Legacy Group S44645

This is an early question that comes up during the initial home buyer consultation.  The out of pocket cost for buyers to make an offer on the house is important particularly with first time home buyers.

Earnest Money  is also known as good faith money to show the seller that a buyer is "earnest" in making an offer to purchase their home. 

The earnest money is credited to the buyer on the HUD Settlement statement as part of the down payment.  It is a check that is written the trust account for the listing broker that remains there until the time of the closing. 

The amount of earnest money is dependent on several factors. 

1.  The listing price of the property.  In Iowa, the amount of earnest money recommended is 1% of the purchase price.  In cases where the property is less than $150,000, it is not uncommon for the amount of earnest money to be $1000.00.

The exception is new construction.  Typically builders will ask for the earnest money to be in the amount of 3% of the base price of the home.  It can be paid in installments, as long as all installments have been made prior to the start of construction.

2.  The type of financing.  When a buyer is paying cash or is planning to make a down payment of 20% or more, sellers expect that the earnest money be a little more than the average.  This is especially important if the buyer is making a lower offering price on the property.  Conversely, if the home purchase is being made with a VA loan, the earnest money amount can be much less since the buyer pays little or nothing out of pocket and closing costs are included in the financing.

3.  The amount of time that the buyer needs in order to close.  In Cedar Rapids, a typically escrow period is 45-60 days.  In cases where the buyer needs more time, the seller would expect a little more consideration for removing their home from the market for that amount of time.

The earnest money is refundable in most cases.  Some common reasons that the earnest money is returned to the buyer would be:

There was a major defect that is found upon inspection that cannot be resolved.

The financing for the buyer is not longer available due to unforeseen circumstances.

The seller is unable to provide a clear title on the property.

The appraisal is not equal to or higher than the purchase price and the seller refuses to lower their price for the buyer to obtain the loan.

In rare cases, the earnest money will be retained by the seller.  These cases are less common, but it usually due to the buyer having remorse and no longer wishing to purchase the property.  If all contingencies have been released and the buyer has no cause, the seller may choose to keep the earnest money or to return it to the buyer.

The earnest money cannot be released from the trust account until a form is signed by all of the involved parties.  They need to be in agreement as to whom will receive the earnest money. 

When you get ready to search for a home, ask about the amount of money that will be required to make an acceptable offer on the property of your choice.  Your agent can give you advice on how to best present your offer in terms and price.  Call me for your free initial home buyer consultation and we will discuss all of your options!

Keep smiling!


Posted by


Karen Feltman, REALTOR®, ABR, AHS, CHMS,                                                                      CNE,CRS, e-Pro, green, GRI, SRES, TRC

Keller Williams Legacy Group

4850 Armar Drive SE Ste B

Cedar Rapids, Iowa 52403

Email: karenfeltman@gmail.com

Mobile  319-521-0701


Licensed in the State of Iowa

© 2010-2018 by Karen Feltman, Cedar Rapids/Iowa City Relocation Specialist 


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Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Karen - This has been a good series you have been doing on your FAQ.  If someone in your market is asking you this question, chances are someone else wants to know the info too. 

I'm about ready to put up #4 but I think I'm going to keep it going because I really like the idea of answering questions that I'm actually getting asked.  Have a good night Karen and a good week.

Jan 09, 2011 02:24 PM #1
Karen Feltman
Cedar Rapids/Iowa City, IA KW Legacy Group - Cedar Rapids, IA
Relocation Specialist in Cedar Rapids, Iowa
@Donne-Thank you for reading! I have found that these questions come up just often enough that posting it will make it easier. I have at least 30 questions on the buyer side and another 30 on the seller side so it will keep me busy for awhile!
Jan 10, 2011 02:31 AM #2
Joshua Harley
Fathom Realty - Plano, TX
CEO, Tech Geek, Innovator, Disruptor, US Marine

This is a great series, and good information for buyers!  It's a wonderful way to create content!

Jan 10, 2011 04:28 AM #3
Karen Feltman
Cedar Rapids/Iowa City, IA KW Legacy Group - Cedar Rapids, IA
Relocation Specialist in Cedar Rapids, Iowa

@Joshua-Stay tuned....I have about 30 of these on both sides, buyers and sellers.  That ought to keep me busy for a while.

Jan 10, 2011 04:37 AM #4
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Karen Feltman

Relocation Specialist in Cedar Rapids, Iowa
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