Before any document or agreement can become a legal and binding contract, for both sides, there has to be ‘consideration’.  Something must be offered as evidence and proof that an agreement is more than just a person’s word to buy.

Earnest money is that consideration.  The more money you put down, the more earnest you are displaying to the seller that you indeed want to buy his home.

But how much shows good earnest?

This is an excellent question with no black and white answer.  All real estate transactions have individual circumstances and situations that require different approaches.  This is one of the many reasons you want to be professionally represented by ‘your agent’ when it comes time to negotiate a contract.  But, as a general rule of thumb, earnest money usually falls within 2% to 5% of the purchase price.

When do I need to pay this?

You place earnest money at the time of an offer in either check or money order.  Your agent takes this check with her when she presents your offer, but keeps the check in her possession.  If your purchase is subject to the acceptance of an inspection, the check can be deposited after you have accepted the inspection in some cases, but it is usually deposited within 24 hours of an accepted offer.

What happens to my earnest money and how is it used?

Earnest money will go into a trust account held by a third party.  This usually is your agent’s company trust account or one mandated by the seller’s agent.  This way neither seller nor buyer has access to it and it can be legally considered as earnest consideration to buy property.  Eventually, as you move toward closing, your agent’s company will submit this money to the escrow closer and it will be applied toward down payment and or closing costs.

What happens if someone defaults? Do I get my money back?

This can be a very complex and complicated question to answer, depending on the situation.  Once again, here is why you need professional representation to look out for your interests.  While this question can become too deep to answer in a simple sentence, I will tell you that the general rule is that if a buyer backs out for no legitimate reason, the seller would get the earnest money.  The reverse holds true if the seller backs out for no legitimate reason.  The buyer is then refunded the money.  I can explain earnest money in further detail to you when we are together, but this is the basic purpose or intent of what earnest money was designed to do.