What is earnest money?

If you have recently purchased a home and used Hywater Title for the closing services, we have probably already met! If not, I’m Lisa Elliott and I handle all earnest money deposits that come through Hywater. I hope this answers any questions you have about earnest money!

So, what is earnest money? Earnest money is a deposit made by a home buyer to show that they are serious about purchasing a property. Typically, the earnest money deposit is a percentage of the total purchase price, and it is paid upfront when the buyer makes an offer on a home. In middle Tennessee, we usually see earnest money between 1% and 5% of the purchase price of the home. However, potential home buyers have been known to put as much as 10% down as earnest money to make their offer more attractive.

The purpose of earnest money is to show the seller that the buyer is serious about their offer to purchase the property, and to provide a financial incentive for the buyer to fulfill their obligations under the contract. This deposit is usually held in the title company’s escrow account until the closing of the sale (closing day! yay!), at which point it is applied towards the buyer’s down payment and closing costs. Sometimes the listing agent’s brokerage will hold the earnest money, but we have seen this trend decline in recent years.

If you’re buying a house in the near future, you should know a few things about earnest money deposits:

1. If the sale falls through due to the buyer’s fault, the seller may be entitled to keep the earnest money as compensation for their time and effort. However, if the sale falls through due to a contingency outlined in the contract, such as a failed inspection or inability to obtain financing, the earnest money is typically returned to the buyer.

2. Earnest money is typically due within 3-5 business days of the contract being signed. Payment must be made with a check, money order, or domestic wire.

3. Keep a receipt of your payment in case your lender asks for a copy.

4. In most transactions (particularly when the buyer is using financing) earnest money must come from the home buyer’s bank account. In other words, your family member cannot make the deposit on your behalf if you are out of town or in the process of moving the money to a new account.

A big part of our job at Hywater is to collect and maintain the earnest money deposits! If you are a buyer or a real estate agent and you have questions about earnest money, please feel free to use me as a resource! I can be reached at 615-896-9494 or hello@hywatertitle.com.

I hope to see you at the closing table soon!