Why Earnest Money Matters to Sellers

NEW YORK – Question: My husband and I are trying to buy a home. We got prequalified, as our real estate agent recommended and have the lender ready, but our offers keep getting rejected. Our agent believes it could be because our earnest money deposit is too low. We’re not convinced a smaller deposit amount would impact the seller’s decision, as after all, if we don’t move forward with the purchase, why would that matter to them? We’d really appreciate any advice.

Answer: That’s a great question, thank you for asking. In real estate, earnest money is a cash deposit buyers provide to show their seriousness with making an offer on the seller’s home. Often referred to as a “good-faith deposit,” it stands out to the sellers that the buyers are committed to honoring the terms of the purchase agreement.

The amount of the earnest deposit is not set in stone and is typically due within a few days after an offer is accepted. It acts as a form of financial assurance for the sellers while the transaction moves forward.

When buyers make the earnest money deposit, the money is not given directly to the sellers. Instead, it would most likely be held by a neutral third party such as an escrow company, title company. This arrangement protects the interests of both parties during the transaction.

The earnest deposit remains in this escrow account until one of three things happens:

• The home sale closes, then the earnest money is applied toward the buyer’s down payment or closing costs.
• The deal falls apart and is covered under a buyer contingency and the deposit money is returned to buyers.
• The buyers break the contract without a valid reason and then could potentially lose some or all of their deposit to the sellers.

Key reasons why an earnest money deposit matters:

• Shows financial commitment.
• An earnest money deposit shows real evidence of the buyer’s intent to purchase the property.
• By committing actual cash up front, it shows financial capability and the intent to complete the home sale. This level of seriousness can help make the buyer’s offer more appealing, especially in competitive situations when there might be multiple offers considered.
• Offers protection for the sellers.

For sellers, taking a home off the market involves a risk because the home then is off the market for several weeks to any other potential buyers and a strong earnest money deposit helps reduce that risk by offering financial protection if the buyers back out of the offer for reasons not covered by the contract's contingencies. It helps offset the lost market time and ongoing expenses, such as mortgage payments, giving sellers greater confidence in moving forward with that particular offer.

The earnest money deposit creates accountability for both parties to uphold the terms of the contract. For buyers, their contingencies within the contract help protect the deposit, making certain it can be recovered if certain conditions are not met.

A few common buyer contingencies:

• Home inspections contingency
• Financing contingency
• Appraisal contingency
• Title contingency

These contingencies lay out a framework for resolving issues that may arise during the transaction and for determining whether the earnest money is refundable to the buyers if the deal falls through.

The earnest deposit money is a normal and a most important part of buying a home, and it benefits both parties because it creates more of a balanced transaction. It shows the sellers serious commitment while still providing buyers protections when handled correctly.

Understanding how earnest money works, what protects it and what puts it at risk can help buyers move forward with confidence in their purchase offer. Be wise to work with a professional real estate agent to make sure the purchase offer is structured to protect your best interest every step of the way.

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