Who: Earnest money is associated with the buyer showing his/her good faith towards a seller.
What: It is simply a deposit (ranging anywhere from 1% – 5% of the purchase price) put forth from the buyer.
Why: Think about it this way: You cannot rent an apartment without a deposit, right? So, you cannot buy a house, or make an offer to buy a house without showing good faith a.k.a. a deposit such as earnest money. When you make your offer you also put forth earnest money but that deposit is protected by specific contingencies.
When: Earnest money is given at the time of the offer or right after it is accepted.
How: The check is collected by the real estate agent or closing attorney and held by the brokerage/closing attorney until consummation or cancellation of the contract.
Where: Earnest money check is held in an escrow account.
Along with earnest money, you also have the three contingencies that protect you from losing that deposit: due diligence contingency, appraisal contingency, and a finance contingency. All of these contingencies protect your earnest money. So if within the timeline of those contingencies that specific item does not work out, you would get your earnest money back.
Here’s a breakdown of each of these contingencies:
Due Diligence Contingency – In the state of Georgia, earnest money can be refunded to the buyer if he/she wishes to back out of the contract within the due diligence period for any reason.
Appraisal Contingency – If an appraisal comes in low, the earnest money is protected according to the terms of the contingency. Make sure to pay attention to these stipulations within the contingency as they can vary. Overall, if an appraised value is lower than the sales price on the contract, typically there are a couple of options; 1) Lower the price if the seller agrees. 2) Renegotiate a new price between buyer and seller, typically a “meet in the middle” type of agreement. 3) Buyer pays the sales price no matter what the appraisal says, which means the buyer will bring more money to closing. 4) Terminate the contract and find another home.
Finance Contingency – If a buyer does not get approved on their loan within the finance contingency, this contingency protects him/her from losing their earnest money. However, if the contingency ends and the buyer’s loan is denied, the buyer will lose the earnest money. This is why it is important to make sure those dates are followed. If no full loan approval is obtainable by the end of the contingency, make sure to at least get a very good idea from the loan officer if the deal looks good or still has questionable factors in the way. If the questionable factors are in the way, you proceed at least as an educated buyer and know that your money is at risk. But again, you have to pay-to-play and keep the home off the market to figure out your loan further.
Reasons to lose your earnest money: You as a buyer are having the seller take the home off the market for an extended period of time, and if you go past those contingencies or those contingency dates, you will lose that earnest money. Overall it is best to think of earnest money as the cost of doing business.