Understanding How Earnest Money Works

Whether you are buying a home for you and your family for the first time or have completed the home buying process before, terms such as due diligence and escrow can be easily confused. 

Unlike an attorney or a real estate agent, you may only be a part of this process once or even a few times throughout your life. It is understandable that someone would need to learn or relearn some of these terms and how they apply to them specifically.

The Due Diligence Fee

After you have an accepted offer, you will enter into the due diligence period. During this time, you will likely have the house appraised and inspected. This is your opportunity to get a better idea of what you are investing in. An experienced and professional house inspector will find everything that doesn’t work, needs repair, or has the potential to need either in the future. If an HVAC system needs to be replaced next year, you can bring this to the seller’s attention. 

During the due diligence period, you will put up the due diligence fee. When compared to the cost of a home, the fee is relatively small. The amount depends on the price of the house. Your agent may suggest a higher amount to show you are interested. Or perhaps a smaller amount if you are worried about issues surfacing during the inspection. There will be contingencies listed under which you will have your money returned to you. But if you choose to walk away, the seller will likely keep your due diligence fee. 

The Next Phase: Earnest Money & Escrow 

Think of earnest money as a means of conveying your intentions to the seller. In terms of the amount, this is going to be up to you and your agent. Generally, it equates to 1% or 2% of the purchase price. The higher the amount, the potentially louder your message is. Two percent of a $500,000 home is $10,000. That amount gets deposited into an escrow account. Ultimately, it will get subtracted from the purchase price of the home. It is not additional money that you have to pay. 

If your dream house comes on the market and you choose to pursue that instead, the seller will hold onto the earnest money. They took their house off the market, and that money may serve to compensate them for doing so. 

Fraser, Wilson, & Bryan, P.C. 
Your attorney and agent will address contingencies in which you can rescind your offer without losing the money you put down. Because you are making one of the most significant financial investments of your life, having a professional and experienced attorney to look out for your interests cannot be overstated. If you are preparing to buy or sell your home, contact Fraser, Wilson, & Byran, P.C., to schedule your consultation.