At last, you’ve found the house of your dreams and are ready to make an offer. You’ve been told that, in order for your offer to be accepted, you will have to produce an earnest money deposit. Depending on market conditions and the seller’s whim, this may range from around 1% to 3% of the property's purchase price. That’s no small change –in many markets, it can equal tens of thousands of dollars. So, it’s best to be fully informed about where that money is headed once it’s out of your hands.
The form in which the earnest money deposit must be paid is, in theory, negotiable (just like most terms in a real estate purchase). Sellers will, however, usually make a notation in the local listing service about their preferred form of payment, and few buyers try to ask for any variation.
Sellers are most likely to be flexible if the buyer has a valid reason for preferring one form of payment over another. Most sellers will accept a personal check– after all, if it should bounce, the seller will find out early on that the buyer is likely not a strong prospect to close the purchase.
However, in hotter markets, it isn’t uncommon to see sellers requiring a cashier’s check, wire, or money order to ensure a fast, seamless transaction.
A seller who decides to accept your offer WILL deposit your earnest money, so be sure to have the funds available to cover it. Having the check bounce is a surefire way to lose the seller’s and lender’s trust, and may result in the failure of the contract, as well. If your check were to bounce, the seller might also still be entitled to collect the earnest money from you via legal action.
On a related note, also be sure to adhere to the deadline stated in the contract for producing the earnest money. In hot markets, the seller may require that a check for the earnest money be delivered with the offer. In most markets, the earnest money check will be due within 48 hours after the acceptance of the offer. If you do not produce the earnest money on time, you will likely be in default on the purchase contract, and the seller could begin to work with another buyer who is waiting in the wings.
Once your offer has been accepted and you have delivered your earnest money check, the funds will most likely be held until closing, in one of three places:
However, it is possible for nearly any entity (or even an individual) to hold the funds. In any case, the keeper of the funds needs to be agreed upon by the parties to the contract (you and the seller) and named in writing.
One of the most commonly asked questions about earnest money is whether or not it will earn interest for the buyer while it is being held during the sale. The unfortunate answer is most likely not. Earnest money is usually held in a non-interest-bearing account. If it is kept in an interest-bearing account, the seller and buyer need to agree to the terms of the interest earned on the deposit. Some states solve the question by providing in the standard contract to buy and sell that any interest earned will go to a fund for the purpose of providing affordable housing or some other public interest. Read your purchase contract clearly so you fully understand where any accrued interest may go.
Once you and the home seller get to closing, the earnest money will be applied in the manner specified in the contract. Usually, the amount of cash the buyer needs to bring to closing is reduced by the amount of the earnest money, as the earnest money will be applied directly to closing costs or the down payment. Should something go wrong during the transaction, however, how the earnest money will be distributed will be determined by a number of factors outside the scope of this article.