Real Estate word of the week: “Earnest Money”

There are many words that are used in a real estate transaction that most people don’t understand.  This week we are going to talk about the word(s) “Earnest money.”

Earnest Money. A sum of money paid by a buyer upon entering a contract to indicate the intention and ability of the buyer to carry out the contract. Normally such earnest money is applied against the purchase price. … A deposit of part payment of purchase price on sale to be consummated in future.

Earnest money is something many buyers don’t anticipate when buying a house.  But it’s an important part of presenting a strong offer to a seller.  As mentioned above, earnest money is paid upfront by a buyer when making an offer on a home.  If the offer is accepted generally the money must be deposited with the escrow company handling the transaction immediately. It can be in the form of a personal check made out to the escrow company. This money is part of your down payment.  It is your way as a buyer of showing that you are making this offer in good faith.

There is no set amount for earnest money.  The more you put down the stronger you look as a buyer.  However, if for some reason you break the contract to purchase the home the earnest money could be forfeited to the seller as a remedy for taking the home off the market while under contract with you.  In Washington state, a seller cannot take more than 5% of the purchase price as damages from earnest money though.

An experienced Realtor knows that part of their job is to make sure that the buyer is informed of all the time constraints on the contract, to make sure that they understand and perform the required acts during those time frames, and the risks if they don’t.  The biggest risk for the most part is losing the earnest money.  As long as you the buyer perform according to the contract there is no risk.  But, make sure you know when and what you are required to do to stay in contract.