What Happens to Earnest Money in the Escrow Process?
One of the basic components of escrow is Earnest Money. You may have heard this term in regard to “the initial deposit” or “opening the account,” but what does it all mean?
Today we will look into the meaning behind earnest money and explore why it is needed in the escrow process.
What is Earnest Money?
First of all, let’s define earnest money. Earnest money is a deposit into an account (in this case, an escrow account) by a buyer to show that he/she has the intention of finalizing a deal.
It can also be called earnest payment or good faith money.
The term “good faith money” implies that you are making a deal with the intention of fully upholding all of the conditions, and the deposit itself shows that you are committed.
If you’ve heard the phrase “show me the money,” this basically sums up what earnest money is for – to show that you are serious about purchasing a home.
Start of Escrow Process
The earnest money deposit is what opens the escrow account and starts off the process. This is usually split between seller and buyer, the specifics of which are typically agreed upon in the initial contract. Earnest money is held in escrow until closing, where it is then applied to the purchase. There are a number of reasons why the deal may not go through, but if that is the case, then the earnest money may be refunded.
Typically, the earnest money cost ranges from 1-3% of the property’s purchase price. Each deal is different though, depending on the market, so in some cases you could be paying as little as $1,000 for the deposit.
When Can The Seller Keep Earnest Money?
The seller can keep earnest money when the contingencies of the escrow process are not satisfied.
So considering the escrow process, when the buyer makes the earnest money payment at opening, that money is held in escrow until closing — then the money can be applied to the payment. But, this is not always the case.
Should the contract fall through for any reason, there are often contingencies, for example, an Inspection Contingency, to protect the buyer and allow them to get their earnest money back.
However, if something happens outside of the contingencies, then the seller can keep the earnest money.
The most common reason why the seller would get to keep the earnest money is if the buyer simply backs out of the deal. They may change their mind about wanting the house, so they will forfeit their good faith payment to the seller.
Another situation where the seller can keep earnest money is if the buyer fails to meet the deadlines of the contract, or fails to uphold any aspect of the deal, therefore breaking the contract.
Earnest Money Refund: Contingencies
A contingency protects the buyer and offers the option to get out of the contract if they are not comfortable with the agreement. These contingencies have deadlines that are negotiated by both parties of the contract, so if something is not met by a deadline, the buyer can get their money refunded.
Some common contingency clauses are:
- Home Inspection Contingency – If the home goes through an inspection and does not pass, the buyer can usually negotiate to have the seller pay any additional costs or be refunded.
- Appraisal Contingency – If the appraisal determines that the value of the home is lower than the agreed-upon purchase price and both parties cannot renegotiate a new price, the buyer can back out and be refunded.
- Home Sale Contingency – If the buyer is unable to sell their current home, this contingency allows them to back out of the purchase of a new home to protect them from paying two mortgages at once.
Additionally, there are a few other reasons why a buyer may be refunded earnest money. If deadlines are not met, the contract will not be upheld. One example is the Title Review Deadline.
Title Review Deadline for Earnest Money
If the home is not proven to legally belong to the self-proclaimed owner by the title review deadline, the earnest money can be refunded to the buyer.
Each contract is different, so be sure to go over every aspect of your specific deal in order to fully understand what you are agreeing to and what you must follow through with.
Ready to Make An Earnest Money Payment?
If you are thinking about buying a home, contact us at New Venture Escrow with any questions or concerns. We are eager to help you whether you are buying or selling, and our team of experts will guide you through the escrow process.
If you want a full overview of the entire escrow process, check out our fully loaded resources on all things escrow here!