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The Importance of Earnest Money

Welcome back to another week! Today we are talking about earnest money, or as a client of mine once put it “extortion money”. While not the most exciting subject it’s one that’s worth talking about since its one of the things most people buying a house for the first time, or for the first time in a while, don’t know about or don’t remember. It can also be a little confusing because you’re handing over a large sum of money that may or may not end up being used, or it might be given back to you, but it’s also not your down payment. So lets dive into this one together.

The short answer, is that this is a good faith deposit to the seller to show that you are serious about buying their house. However this money DOES NOT go to the seller. It goes to the chosen title company and stays in holding until the deal falls through or it is applied to the closing costs at, well, closing. So while this is the short answer, it might even make things a bit more confusing. So let’s look at what earnest money is not.

Earnest Money Is Not

Extortion money

Your down payment

A payment to your realtor

A payment to the seller

A payment to the title company

A fee from your realtor

Money you are loosing

Earnest money in our modern times, and in reality is a protection or commitment for both the buyer and the seller. Since it is held by an impartial third party it helps to protect both parties from backing out of the deal without just cause. In other words without being by one of the contingencies in the purchase agreement.

So while earnest money might be confusing, and probably annoying at times, it is an important part of a real estate transaction. It adds security to both buyers and sellers, and helps ensure all parties stay accountable to the contract. While it isn’t a perfect system, and things can still go wrong, and people back out when they’re not supposed to, it’s still the best we have in the real estate world!

If you have any questions about this, just let me know. I’m happy to talk about it, if not, see you all next week!

Pro Tip: always get your earnest money from a bank account that it can be traced back to. Otherwise it’ll be a road block down when your lender is getting ready to check all your finances! In other words, don’t grab that pile of money under your mattress for this!

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