What is Earnest Money?

If you've ever read or seen Oscar Wilde's The Importance of Being Earnest, then you know that this play makes fun of its title and doesn't take earnestness, or acting with sincerity, very seriously at all.

Your earnest money, however, is something to be taken very seriously, especially since it's discussed towards the end of the homebuying contract process. The issue of earnest money comes up once a seller accepts your offer and you both sign the purchase agreement. One handy way to think of it? Look at the earnest money as the buyer's "skin in the game." 

Earnest Money In a Nutshell

Like a deposit on a rental, earnest money is a sign of good faith, which shows that you're committed to seeing the home purchase through to its conclusion. It's a reassurance to the seller that you'll be there at the closing table. In Chicago, and Illinois at large, there is not an average amount of earnest money, per se, nor is there a single date when the money is due. Instead, to show that you're committed to buying a particular home and to put some money towards the down payment, you'll typically tender the earnest money in two separate installments.

Generally speaking, you - the buyer - will deposit $1000 as initial earnest money when the seller signs the contract and makes it official. 

Following the attorney review process (usually 5-10 days later), you'll then put forward a second installment of earnest money, commonly referred to as the balance of earnest money, which could range anywhere between 3-10% of the contract price.

Who Gets the Earnest Money?

In depositing the balance of earnest money, you'll typically make out a personal check, cashier's check, or a wire transfer to the seller's brokerage. Some companies might allow you to use a credit card, but it's wise to choose another method to avoid potentially damaging your credit score, which could then go on to mess with your mortgage loan.

It's uncommon, but it's worth noting that in certain cases the listing broker does not hold earnest money. In these situations, your broker or attorney will hold onto it. But, it's important to remember that nobody "gets" the earnest money until the sale (ideally) closes. At this point, the amount you've paid will be applied to your proceeds at the closing table. In other words, your earnest money becomes a part of your down payment. 

Earnest money stops buyers from running around and putting offers on multiple homes, focusing the home buying process for a greater chance of success. It also prevents buyers from taking several locations "off of the market" until they decide which one they like best (since a seller can still show a contracted home to interested buyers, but it's quite rare to get requests once a home's status is "under contract"). It can also help you win a bid if you're in competition with another buyer, if you offer a larger amount! In any case, a successful sale will result in your earnest money being applied to your home's purchase.

Canceling the Contract and Getting Your Earnest Money Back

Remember, trust and commitment go both ways! Earnest money allows the seller to feel secure, too.

Should the buyer back out of the deal for reasons not allowed by the contract, the seller will then typically receive the earnest money from the escrow agent. As a buyer, calling your contingencies (canceling during attorney review, or not being able to obtain a mortgage) are legitimate and legal means of canceling a contract, and you're entitled to get your earnest money back. But this does not mean that you can get the money back should you simply have buyer's remorse!

This means that you need to pay attention to the contingencies within the contract before giving money to the escrowing party (and not the seller). Remember, there are very strict rules about what an escrowing party may do with your earnest money deposit. In most cases, the escrow agent cannot disburse the funds to anyone unless one of two things happens:

  • both parties sign a statement authorizing the release of the money
  • a court of law issues an order as to how the funds should be disbursed

So, under what circumstances would you, as a buyer, generally get your earnest money back? Escrow companies should return the earnest money if there is an issue with inspection findings or if the seller defaults on any other written contractual stipulation. The contract must be legally terminated in order for a refund to be issued. 

As a buyer, you should never assume that you are fully protected, so have your attorney or real estate agent break down all of the contractual details for you, at every step of the way. Don't sign anything until you understand the fine print. 

When you're ready to begin the first step of the homebuying process, don't hesitate to get in touch with the Real Group Team! Our team of experienced real estate pros knows that what it takes to get from contract to closing. No matter how far along you are, Real Group is here help, from starting your home search to understanding earnest money. We look forward to helping you find a new place to call home! 

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Chicago, IL 60614

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