Earnest money is one of the first real commitments a buyer makes. Here's how it works.
What is earnest money?
Earnest money is a deposit a buyer makes when an offer is accepted to show good faith. It's held in escrow, often by the listing brokerage or a title company, under the terms of the contract. If the sale closes, it's credited toward the buyer's down payment or closing costs.
Why it matters
Earnest money gives the seller some assurance that the buyer will follow through. In a competitive market, a stronger deposit can make an offer more attractive.
How much to offer
The amount is negotiable and varies with price and local practice. Your broker can tell you what's customary for similar homes. Many contracts call for an initial deposit followed by an additional deposit after attorney review.
What happens to the deposit
If the sale closes, the deposit is applied at closing. If the deal ends, what happens depends on why:
- If the buyer terminates under a contract right, such as the inspection or mortgage contingency within its deadline, the deposit is generally returned.
- If the buyer simply walks away without a contract right, the seller may have a claim to it.
- The escrowee generally won't release funds without both parties' agreement or another basis in the contract, so disputes can take time to resolve.
Contingencies protect your deposit
Inspection, mortgage and attorney review provisions let you exit under defined conditions. Deadlines are strict, so know them from day one.
Negotiating terms
The amount, timing and conditions are all negotiable. Your attorney can clarify these terms during attorney review.
Common mistakes
- Not reading the contract's earnest money and default terms
- Offering too little in a competitive market
- Letting contingency deadlines pass without acting
Final thoughts
Earnest money is both a commitment and a strategy. Understanding it helps you make a strong offer and protect your deposit. See buyer representation.
By Attorney Shara Kamal. General information for Illinois readers; not legal advice for a specific situation.