Earnest Money Explained

What is Earnest Money?

One of the questions we are most often asked is, “What is Earnest Money?”.  According to Investopedia, earnest money is a deposit made to a seller that represents a buyer’s good faith to buy a home. The money gives the buyer extra time to get financing and conduct the title work, property appraisal, and inspections before closing. In many ways, earnest money in Oklahoma can be considered a deposit on a home, or an escrow deposit.   

People will also ask if Earnest Money is required with every contract.  Technically, depending on the contract written, Earnest Money may not be required, however, sellers generally expect to receive an earnest money deposit with an offer.  Earnest money can signal the seller as to how serious you are about your offer. 

How Much Earnest Money Do I Need?

So, how much earnest money (EM) is required?  Ask 100 realtors, and you will probably get 100 answers, but a good rule of thumb is 1% of the purchase price.  Don’t expect to write an offer on a $500K home and put down $500 in EM.  The more competitive the market, the more EM is usually offered.  Often times, if you are purchasing a new construction or custom home the builder may require a larger amount of earnest money.

Where Does My Earnest Money Go?

In most cases, the earnest money is applied to the purchase price at closing.  It can also be distributed with a written agreement between the buyer and seller.  In the event of a dispute over earnest money the contract terms for resolution will take place.

What Protects a Buyer’s Earnest Money?

Inspection Period
In Oklahoma, our contract allows a buyer to perform a variety of inspections. If for any reason, in the sole opinion of the buyer, the inspections are unsatisfactory, the buyer may terminate the contract and receive a refund of the earnest money.

Appraisal
If the buyer is getting a loan, the lender will require that an appraiser determine the fair market value of the home. If the appraisal is less than the purchase price, the buyer can choose to terminate the contract and receive a refund of the earnest money.

Other Contingencies
The contract may contain other contingencies such as selling an existing home, or a financing contingency. The buyer may be able to terminate a contract and receive a refund of their Earnest money of all the terms of the contingencies were followed

If a Contract is Terminated, Who Gets the Earnest Money?

If a purchase contract in terminated, the buyer and seller must agree to a written release specifying the distribution of the Earnest money. In the event the buyer and seller cannot agree to distribute the Earnest money, they must follow the resolution steps as specified in the contract.

Whether the buyer gets their earnest money refunded will depend on why the contact was terminated and whether the buyer was within terms of the contract to terminate.