WHAT YOU NEED TO KNOW
ABOUT EARNEST MONEY
You’ve just bought a new house - congratulations! So many things to think about, one of them being your earnest money.
What is Earnest Money?
Basically, your earnest money is delivered on or around the time you submit a contract to purchase your new home. It’s the way you say that you are serious about this house. Without a financial commitment, how does the seller know that you’re really interested in their home and not five others?
How Much Earnest Money Do You Need to Put Down?
This question will vary from state to state and even region to region. When I first started in the business in 1998, the earnest money was 10% of the contract price. With the huge increase in prices we saw running up to the recession, the number now hovers at around 3-5%.
In the Chicago North Shore towns of Winnetka, Wilmette, Kenilworth, Glencoe, and Northfield (and actually the wider Northern Illinois area) the payment is made in two parts.
Our local contract (the Midwest Real Estate Data) stipulates that an initial amount is tendered within a day or so of the contract signing. It used to be that the check was attached with the contract but that was done away with. That amount is usually between $1000 and$5000.
After the contingencies have been met - usually the house inspection and attorney approval of the contract (we are an attorney area) the balance of the earnest money is due. A $500,000 contract with a $2500 initial earnest money would require a balance of $22,000 ($500,000 x 5% = $25,000 - $2500 = $22,500.)
Your region might have different criteria for its due date but ultimately, a certain percentage of the contract price. It’s based on the final negotiated price, not the offer price.
Where Does the Earnest Money Go?
Large brokerages, like Baird Warner where I work, set up an escrow account for you and deposit the money. The money will remain there until the closing and go toward your final payment for the home.
Long ago, buyers were able to reap a small check at closing because the earnest money accrued some interest during the escrow period. That was pretty much eliminated with rates being incredibly low and not worth the effort.
Smaller brokerages, independents, and some discount brokers do not hold earnest money. They will usually be able to have the seller’s attorney set up the escrow account in the same manner that a large brokerage would.
Do I Get My Earnest Money Back if I Cancel the Contract?
It depends. In the North Shore suburbs the answer is usually yes but I have seen buyers default on the contract and lose their earnest money.
Your initial payment (the smaller one, if there is one) is always refunded if the house has inspection issues that cannot be resolved. There is always a time limit on this - here it is 5-10 days but always check with your real estate agent to know the dates.
Our local contract is very specific and deciding that you paid too much is not a valid reason to cancel it. That’s where it gets thorny and if it’s close to the closing date you may not get the earnest money back. Always check with your real estate agent or attorney on this for practices in your state will certainly be different.
Whether you are a buyer or seller, make sure you discuss the nuances of earnest money with your real estate agent. Too many sellers assume they get to keep all or part of it when in fact, it might all be returned to the buyer.
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