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Buying a Home 101 : What is Earnest Money?

Glass jar labeled house filled with coins.

What is Earnest Money?

The definition of Earnest Money is : money paid to confirm a contract.  Earnest Money can also be known as “consideration”.

Why is Earnest Money collected?

Earnest Money is the legal tender associated with a legally binding contract.

When is Earnest Money turned in?

When making a purchase on a property Earnest Money is collected once a contract is negotiated and all terms are acceptable and agreed between the Buyer(s) and the Seller(s).  There are times where the Earnest Money will be turned in with the initial contract, but more often is turned in within 1-2 business days once the contract is agreed.

Who holds my Earnest Money?

Earnest Money is held generally at a Title (Escrow) Company or at the Brokerage of the Buyer’s Realtor.

What happens to the Earnest Money if the deal falls apart?

In the event that the purchase of a property falls apart Earnest Money is released based on the terms of the contract and where the parties are at in the contract period.  Every Purchase and Sale Agreement will have certain terms regarding the Earnest Money.

In the event there is a dispute between the parties regarding the release of the Earnest Money the Brokers of each Brokerage will review the contract and make a determination.  If the parties do not agree with the Broker’s determination then legal mediation will begin.

Where does the Earnest Money go at closing?

Earnest Money is applied to the Buyer(s) down payment at the closing of a transaction.


I hope this information is helpful!  If you have any questions regarding Earnest Money feel free to ask in the comments section!

Our next Buying a Home 101 topic will be on Home Inspections!  Let me know what questions you have about home inspections and I’ll be more than happy to ask the experts!

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