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What is Earnest Money?

If you aren’t familiar with earnest money, today’s your lucky day! Here are the basics.

Earnest money, typically called good faith money, is what you put down when you’re purchasing a home. You usually pay it to the title company who will hold the funds for you, and then that money goes towards the purchase of your new home.

This initial investment usually shows how serious you are about purchasing a home in the seller’s eyes. In Macon County here in Central Illinois, the amount of earnest money is about 1-3% of the purchase price of the home. Sometimes it’s a little more, sometimes it’s a little less. In today’s hot real estate market, a little bit more earnest money upfront might just push you over the edge to get that house that you really want. So if you have the extra cash and you’re willing to put more good faith money down and make it $2,000 versus $1,000, that could be the deciding factor for a seller who has multiple offers.

If all goes smoothly in the transaction and you get to the closing table, that earnest money is usually applied to your down payment and closing costs. For example, let’s say you have to bring $5,000 cash to close on your transaction. In this case, it would be $5,000 minus the $1,000 earnest money that you’ve already paid (and that the title company is most likely holding for you). If the transaction doesn’t go through, the title company still holds those funds for you so that they can determine how the money needs to be disbursed. If the deal fell through due to failed inspections or financing didn’t pan out, the buyer typically gets that money back. However, if the buyer simply decides to walk away from the transaction and doesn’t want to purchase the home, that may result in the seller keeping the earnest money.

There are of course many different circumstances that can lead to various outcomes, but this is an overview of how earnest money normally works. If you’re working with a real estate broker, they should be able to provide you more information on earnest money and what would be an appropriate amount of money to put down towards your next real estate purchase. If you aren’t working with a broker, our team of professionals would be happy to help you. You can reach us at (217) 422-3335.

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