Ask a REALTOR® - What’s Earnest Money?

Posted by Mike Brown Group on Tuesday, January 21st, 2020 at 9:00am.

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When buying or building a home in Idaho, or in any state for that matter, the seller requires consideration in order to enter into an agreement with a buyer. Consideration is more commonly known as “earnest money,” which is a payment (outside of financing) to the seller that shows that the buyer intends on purchasing the property. You can call it a “good faith” payment in an effort to motivate the seller to take the home off the market and move toward selling the property to the interested buyer.

Where does the earnest money payment go?

Earnest money doesn’t go directly to the seller as it’s held in an escrow account and goes towards the final purchase price of the property once the transaction is finalized.

How much do I pay?

Earnest money amounts vary depending on if you’re looking to purchase a resale property or a new construction home. Earnest money amounts are rarely under $1,000 and can sometimes be higher, especially if multiple offers have been received on a property, which happens in a hot real estate market like the Boise area. Accordingly, the seller can demand a higher payment in order to accept a buyer’s offer.

Builders usually require a higher upfront payment on build jobs, somewhere between five and ten percent down. And unlike a resale purchase, where funds are held in escrow, builders may actually use the money to start the build process. Earnest money at its core is a protection for the seller, showing that the buyer is serious.

What happens to earnest money if the buyer backs out of the deal?

Depending on the circumstances, earnest money is usually given to the seller. However, there are a few circumstances where the earnest money could be returned to the buyer. These include:

  •       The home not appraising for the sale price
  •       The home inspection uncovers a significant repair such as structural issues
  •       The buyer failing to secure financing by a specific deadline

Contractually, additional contingencies can be added to where the buyer is returned their earnest money deposit, but generally these are limited.

Do I have to put earnest money down?

The short answer is no as this depends on the type of loan you’re getting (e.g. VA Loan). However, not willing to have “skin in the game” may cause the seller to want to do business with someone else, especially if they’ve received multiple offers. If you’re able to put the minimum amount down, that’s great, but if you can increase your earnest money offer, that could be more advantageous.

The last word

Earnest money is a necessity with any real estate transaction and can help put you in a more favorable position when buying a home. Working with a REALTOR® when buying or selling a house in Idaho can help make sure you get the best deal possible, while avoiding mistakes that could cost you money. The Mike Brown Group at Silvercreek Realty Group can help you navigate the very hot Treasure Valley Real Estate Market.

Ask a REALTOR® is a bi-weekly feature on The Mike Brown Group website blog. 

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