What is Earnest Money and How Does it Work

What is earnest money? Earnest money is simply a sum of money made from Buyer to Seller to demonstrateHand with cash a Buyer’s seriousness about purchasing a property.

If an offer proceeds to a successful closing, a Buyer can consider his earnest money deposit a type of pre-payment which will be applied to his down payment or closing costs or put toward the purchase price.

Check out the following commonly asked questions to learn more about how earnest money works.

Do all Buyers need earnest money?
Earnest money is not required, however it is highly recommended to demonstrate to the Seller that you, the Buyer, are committed to seeing your offer through up until the time of closing.

Why is earnest money important?
A Buyer’s offer and his earnest money deposit will be taken into consideration by the Seller when the offer is presented so it is important and the amount is important too.

If, for example- a Seller received two offers from two different parties with a similar purchase price and terms, but one has an earnest money deposit and one doesn’t, it stands to reason that the Seller will give more consideration to the offer with the earnest money.

Likewise- if you were a Seller and were presented two similar offers from two different parties, yet one had $500 in earnest money and the other had $2000 in earnest money, which offer do you think you would you give more consideration to?

How much earnest money is enough?
There are different guidelines based on many different factors, but typically $500 is the minimum. Generally speaking- earnest money deposits range from 1%-5% of the purchase price.

How much to offer as earnest money depends on a great deal of variables. A $500 earnest money deposit may be adequate for a $150,000 property, yet insufficient for a $600,000 property.

When do I need earnest money?
As a Buyer, you should have the money to cover your earnest money deposit in your bank account at the time you write an offer. In Iowa, the earnest money is required to be deposited into the listing agent’s escrow account within 5 days of offer acceptance, where it will be held until closing. Held does not mean uncashed! The check will be cashed and must be made payable to the listing agent’s office, not to the Seller.

How might I lose my earnest money?
Earnest money offers assurance to Sellers that the Buyer won’t back out of the deal without valid cause so it’s important as a Buyer to fulfill all your obligations as they are stated in the purchase contract and do so within the specified time frames.

If a Buyer backs out of the deal without valid cause, it would result in forfeiture of the Buyer’s earnest money.

Can I get my earnest money returned to me?
A Buyer is only qualified to receive refunded earnest money if he had, according to the terms of the contract, valid cause to do so.

For example- The Buyer’s offer includes a financing contingency, allowing the Buyer 7 days to obtain financing. If the Buyer is unable to obtain his financing within the 7 days as stated in the contract and decides he wants to backs out of the deal, he would be allowed to do so and would also be entitled to have his earnest money deposit returned to him.