Earnest Money: More Than Just a Deposit

Earnest money is a deposit made by the buyer to show they’re serious about purchasing a property. It is also called “consideration” in contract law. Think of it as a financial handshake, a tangible sign of commitment. The amount varies by market but often ranges from 1% to 3% of the purchase price. This money is typically applied toward the purchase at closing and is held in a trust or escrow account.

Why It Exists

Earnest money reassures the seller that the buyer is committed and willing to back that commitment financially. Without it, a seller risks taking their home off the market for a buyer who might not follow through.

When It’s Refundable and When It’s Not

Refunds depend on the contract. If the buyer walks away for a valid reason under a contingency (inspection issues, appraisal problems, financing denial), they can usually reclaim the deposit. But if the buyer backs out without a contractual reason, that money may go straight to the seller.

Common Pitfalls

• Missed Deadlines: If inspections or financing approvals aren’t completed on time, the earnest money can be forfeited.

• Vague Contract Terms: Ambiguous language about refund conditions can create disputes.

• Emotional Transactions: In high-stress situations, like sales involving divorcing spouses, emotions can cloud judgment about deadlines and obligations, putting earnest money at risk.

The Bottom Line

Earnest money is more than just a deposit; it’s a powerful part of the negotiation process. Understanding the rules around it and documenting them clearly can prevent costly misunderstandings.

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