Earnest money is the amount of money a Buyer puts down when they write a contract to purchase a home. This is to show the Seller that they are ‘earnest’ or serious about making their offer. Now, the earnest money doesn’t go to the Seller; it gets made payable to the Listing Broker and is deposited into their Trust Fund. It stays in that Trust Fund until closing day and then comes back to the Buyer as a credit on the final Closing Statement. So, if a Buyer’s puts $5000 down and they owe $20,000 at closing (which includes closing costs and down payment), well, they would only owe $15,000 because the Buyer has already paid $5000 ‘deposit’.

What is the typical amount of Earnest Money?

In Des Moines, Iowa, it is typically not less than 1% of the purchase price. But, lately, and it depends on the current market conditions, I have been advising my clients to offer a higher amount to show the Sellers they are sincere about their offer and that they are financially able to fulfill their obligation to finalize the purchase of the home. This is an extremely effective tool, I have found, to set a Buyer’s offer apart from any other offer that may also be on the Seller’s kitchen table! And in today’s market with considerably more multiple offers than not, this is one way my clients have been able to achieve home ownership!

What if the Inspection doesn’t go well…do I get my Earnest Money refunded?

Again, in Des Moines, Iowa, if the Seller and Buyer cannot come to terms of agreement with any items needing repaired, etc, then the Buyer has the right to step away from the contract and their Earnest Money will be returned. The Des Moines Area Association of Realtors contract states:

     “Within this inspection period, BUYER(S) must notify in writing, SELLER(S), as shown herein, of any deficiency or hazards. The SELLER(S) shall       notify the BUYER(S) within three days, in writing, of what steps, if any, SELLER(S) will take to correct deficiencies or hazards before closing.           The BUYER(S) shall, within two days, in writing, notify the SELLER(S) that (1) such steps are acceptable, in which case this agreement, as               modified, shall be binding upon all parties; or (2) that such steps are not acceptable, in which case this agreement shall be null and void, and         any earnest money shall be returned to BUYER(S).

The only situation in which the Earnest Money doesn’t likely get refunded is when a Buyer wishes to walk away from the contract without due cause.

And that is Earnest Money 101!