Say Vern…How much Earnest Money Do You Need to Buy a House?

I don’t know if Ernest ever went buy a house in the series of comedies Jim Varney made in the 1980’s but it could have made a good story line. However when buying a home, understanding real estate terms is no laughing matter In fact, it is serious business as a misunderstanding can make or break an offer and but a buyer’s money at risk.

When buying a home, the words thrown around can often be as confusing for a home buyer as Ernest often seemed to be. Home buyers want to be focused on the esthetics and mechanics of the property (the color of the paint and nuts & bolts of the structure) while the structure of the offer is often left to their REALTOR®. So I am never surprised by the silence when I pose the question, "How much are you prepared to write the earnest money check for?”


Earnest money is different than a down payment. These are funds submitted with the offer to the sellers’ real estate broker while a down payment is paid at the time of closing to the bank or mortgage company. The amount of the earnest money is something that the buyer determines based on the property. The amount will vary with each purchase agreement. A buyer must first understand the purpose of the earnest money to determine the right amount to include with the offer.


Earnest money is a term used for the funds that a buyer puts down to demonstrate to the seller their seriousness about buying a home. It should be an amount sufficient enough to indicate to the seller that the buyer will not walk away from the deal without good reason. In Minnesota, 1% of the purchase price is customary. But a buyer can offer more and a seller can ask for a higher amount as well. A lower amount may be acceptable in some circumstances; however it is important to be realistic.


Only a couple of years ago, a potential buyer wanted to write up an offer on at an open house of a home I had on the market in Forest Lake. The acreage home was set up with stables and a newer home. It was priced in the $300,000 range. This wheeling and dealing buyer wanted to impress the sellers with a whopping $100 earnest money check. The seller was significantly less than impressed. They knew the deal would be on shaky ground as with this unreasonable amount, the buyer could easily walk away from the deal.


Generally the earnest money funds are in the form of a check. If the offer is accepted, the money will be deposited into the listing broker’s trust or escrow account. In Minnesota, the funds must be deposited within three days of an offer having been accepted in writing. Yes, there needs to be money in the bank because that the check WILL be cashed after the offer has been accepted in writing.


If the offer is accepted, the earnest money will be applied to the down payment and/or the closing fees when the closing takes place. If your offer is not accepted the check is not cashed and your original check will be returned to you.


However, if the offer is accepted and the check cashed and then for some reason all contingencies are not met or other situation arises where the sale does not proceed, the buyer does not automatically receive a refund of the earnest money. Nor, does the seller automatically keep the down payment. The funds are disbursed as outlined in the purchase agreement or in some cases; the Buyer and seller must reach an agreement for the cancellation of the agreement before the funds can be disbursed.


Copyright 2009 Teri Eckholm