Real Estate Term of the Day – Earnest Money

“Earnest Money” is a deposit made to a seller from a buyer that is not a large amount of money but is made to indicate the buyer’s good faith in an arrangement. It allows the buyer additional time to seek financing without losing the home that they want. It is typically held by both the buyer and the seller in a joint escrow account until more actions are made to further the deal.

Basically, this concept comes from the fact that entering into a contract to purchase a house technically doesn’t lock the buyer into buying the house, but it does lock the seller into taking the house off of the market. So, to protect the seller and ensure that the deal is made in good faith, a lot of sellers will stipulate that the buyer make an earnest money payment as a deposit. The earnest money is then put towards the down payment when the transaction is finalized, which is usually after inspections are done and the buyer secures a mortgage with the bank. If the deal falls through, the buyer getting their earnest money back will depend on how the original contract was written. Usually, if something happens like poor results from an inspection or the seller terminating the deal, the buyer will get their money back.