In the real estate market, the earnest money check is one of the essential ways buyers prove they're serious to sellers. It's a substantial chunk of change that will be included with your offer to the seller to further prove that you are really serious about buying the seller's house. But once an offer is accepted, what happens with said earnest money? Does it sit in limbo as you wait for the sale to close, or will your check be cashed while the transaction proceeds?
What is earnest money anyway?
Earnest money is your way of telling the seller, “I’m in! I’m serious!” when it comes to buying a house. Once your offer has been accepted—but before the close—you give the seller a check for the agreed-upon amount. The amount is not set in stone, but earnest money typically runs 1% to 2% of the overall purchase price.
“It shows the buyer that you’re willing to give up a certain amount of money in return for the seller taking the home off the market,” says Steve Ujvagi, owner of Atlanta-based Keller Williams Results Team.
Should an earnest money check be cashed?
The sellers could wait until all the contractual obligations are fulfilled to cash the earnest money check, but that’s not what typically happens, says Ujvagi.
“All earnest money checks should be cashed, because if the buyer fails to perform in accordance with the contract, that money will help compensate the seller for the time and expense of having the home off the market,” he points out.
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However, don’t worry that the seller is going on a spending spree with it; the money is deposited into an escrow account, where it is held and then applied toward the down payment or closing costs, ensuring that the buyer gets full credit for the entire amount.
If the sale falls through, what happens to the earnest money?
For any number of financial or personal reasons, sales can fall through after the offer has been accepted. It's frustrating for both the buyer and seller, but it can happen. If buyers back out of the transaction for any reasons outlined in the contract or purchase agreement—such as a failed home inspection—the earnest money is returned. However, if the buyer decides not to buy the house for any reason not included in the agreement, the seller can keep the earnest money.