This week I was asked to explain Earnest Money, so I’m taking a moment to write out a description for the rest of my followers what this somewhat complicated concept is in financing.
The first thing that Earnest Money is not is your down payment on a house. The down payment most often is referring to the difference between the amount you are borrowing on the home loan and the cost of the house. You will place the Earnest Money into an Escrow account, but this is not to be confused with the escrow account that is created to address your taxes and insurance annual expenses.
So what is earnest money?
When an offer is written and accepted on a home in the State of Georgia, it is a legal contract between the buyer and the seller. The buyer’s REALTOR® will have several contingencies written into the contract where the buyer can terminate the contract lawfully, and you and your REALTOR® should discuss these should explain these features. But, if the buyer does not purchase the home, and you don’t use one of these contingencies, then the buyer is in breach of contract. The seller now has the right to seek repayment of damages from the buyer for the time (s)he took the home off the market.
Here is where the earnest money comes into play. When the seller claims damages for the house not selling to the buyer due to a breach of contract the seller can place claims on the money that they set into the Earnest Money Escrow account. Earnest money’s existence is a protection for the buyer in that it limits the liability of the buyer in the contract. Earnest money’s amount is a protection for the seller when the amount is large enough to cover the cost of taking the home off the market during the full closing period.
The most common way to return earnest money to the buyer is at closing when the account holder writes a check to the buyer’s benefit. Often the buyer will then sign the check over to the closing attorney who will then apply the check to the down payment on the home. The second most common way to return earnest money is when the buyer uses a contingency to exit the contract and then both buyer and seller sign an agreement to release the earnest money back to the buyer.
Be sure to speak with your lender if you intend to use your earnest money at closing to help pay for your home and talk to a real estate attorney if you have legal questions about the specifics of returning earnest money in unique situations.