Earnest Money Tips

When you negotiate a purchase agreement with a seller, you'll be asked to put down earnest money.  Earnest money is a deposit that shows the seller you're serious.  It's held in escrow until the transaction is in the final stages.

Your real estate agent can advise you exactly how much to deposit.  Most earnest money deposits are between $2,500 and $5,000 for houses on the lower end of the price spectrum.  For higher priced houses, it's not unusual to see earnest money of $25,000 to $50,000.  If you are competing against multiple offers, earnest money can let the seller know you're serious.

At closing, your earnest money will be deducted from the amount you owe for down payment and closing costs.

If you back out of the deal, you could lose your earnest money.  However, there are almost always a whole slew of exceptions written into your contract.  If the appraisal comes in low, your loan is declined, or your inspection is unsatisfactory, you may be able to renege your offer without penalty.  Talk to your real estate broker about the conditions under which you could get your earnest money refunded (or not).

Like any money that you plan to use to purchase your home, the underwriter will need to "source" your earnest money.  She'll want proof that the funds belong to you and originated from an acceptable source.

• Earnest money is paid to the escrow company - NOT your lender or real estate broker.
   
• If you write a personal check for earnest money, make sure it comes from the same bank account you intend to use for down payment and closing costs.  Or wire the funds from the same bank account.  
   
• The person who signed the purchase contract should pay the earnest money.  Don't allow your wife, son, sister, friend, college roommate, or anyone else to pay the earnest money on your behalf.
   
• If you can't wire the funds or write a personal check (I'm looking at you, Millennials, who don't even HAVE a checkbook), obtain a cashier's check (again from the same bank account you intend to use for down payment and closing costs).  Don't use a money order for earnest money.
   
• Do not use a "credit card check" (i.e., cash advance on a credit card) for earnest money.
   
• Don't write a check from a business account for earnest money unless you've cleared it with your loan officer in advance.

If you have questions about earnest money, ask your lender before you hand the check to escrow.