How Does Earnest Money Work?

What is earnest money? We'll cover how it works and how to make sure you don't lose it if you ever want to back out of a deal!

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0:00 How earnest money works
0:18 What is it?
0:41 When do you pay it?
1:30 How it helps the seller
2:14 How much you need
3:04 Why use earnest money?
3:08 What it does to your offer
3:30 Why contracts are important
4:07 Do you need it?
4:37 Earnest money gets credited back to you
5:52 CalmMoment
6:59 Contingencies
8:08 Pre-Contingency
9:29 Post-Contingency
11:38 How to write a good offer

Hey, Kyle here with winthehouseyoulove.com. Today, we're talking about how does earnest money work. You're going to understand #1 how you can keep your earnest money if a deal falls apart and why it might be helpful to have earnest money to be able to have your offer stand out amongst all of the other offers.
Okay. So first of all, earnest money, people also call this a good faith deposit and it means exactly that. It means, hey, this is money that we're going to put on the contract when you put in an offer on a home to be able to say, hey, we're putting some skin in the game. We're serious about buying this home because the seller wants to know that you're serious when you put in an offer if they're going to accept it. So earnest money is paid upfront with the accepted offer. So what that means is let's say you see house it's 123 Main Street. You say, hey, we want to write an offer. So you write an offer for maybe $200,000 and you say, hey, we want to put $2,000 in earnest money on that contract.
So the seller now sees that. You don't have to give up the $2,000 until they accept that offer. Okay. So it's money that you're putting on the contract is to tell the seller, Hey, when you accept this offer, we're going to go ahead and put some money in that's going to be held by a third party. So they're going to hold it so there's no dispute over somebody taking the money. But just to show you that we're going to put money up front and you don't have to wait all the way until the end to see if we're actually going to follow through with our promise on this contract. So the main point of this is it gives the seller some compensation if the buyer backs out, because put yourself in the shoes of a seller, imagine you accepted an offer for somebody to buy your home and you go through a whole process and maybe you're 25 days in and then all of a sudden, the buyer says, you know what? Eh we just don't feel it anymore and they walk away. Well, you, as a seller, you made plans around somebody purchasing your home. So earnest money can be some compensation for the seller when things don't work out in the seller's favor. Now there are protections for the buyer.
There are a lot of circumstances when the buyer can get that money back. And circumstances where the buyer can lose the earnest money. And we'll talk about those here at the end. So when we're talking about how much earnest money do you need, it's really going to be best to talk with a Realtor about how much earnest money you want to put on a contract.
For instance, it's very common in my local market for people to not use earnest money at all. Earnest money in some markets is becoming a little bit of an outdated practice and it really just depends how competitive the market is and what's going on in that market. For instance, you know, I'm in Dayton, Ohio, so or average median income is lower than most areas, most bigger metropolitan areas. So most people don't put a lot of money down, up front, but you go to a higher income area, let's say somewhere like Brentwood, Tennessee, or Nashville, then you're going to see earnest money be higher because people have more income and assets to put down on contracts and the market's really, really crazy. So now let's talk about why would we want to do this. Number one, i's going to help your offer stand out. Okay. If you have, if a seller sees two identical offers, they're both the same purchase price all the details are the same, but one buyer says I'm not going to put any earnest money down and the other says, we're going to put $3,000 down. Then the seller is going to say, well, this buyer is more serious. They're willing to put more money up front. Okay. Also contracts are a big deal. This is why earnest money exists in the first place. Sometimes what people will do is they'll go write on a home, they'll write an offer for a home, but they're not actually willing to follow through with that contract.

-- Legal --

Kyle Seagraves
NMLS# 1701021
Motto Mortgage Alliance
8900 N. Dixie Dr.
Dayton, OH 45414
Equal Housing Opportunity