Individual state laws and real estate regulations govern the use of earnest money in real estate transactions. All involved in the real estate transaction should be familiar with their state’s rules regarding the handling of earnest money, particularly in the failed transaction with a dispute.
In a thesaurus, a synonym for earnest is sincere. When purchasing your home, the buyer offers a sum of deposited money to indicate their sincerity and intent to go through with the purchase process. The amount offered usually correlates somewhat with the purchase price of the real property, however the price can vary. The amount of earnest money is normally negotiable. A seller might request increasing the deposit of earnest money for various reasons:
Buyer has requested extended period to closing
Buyer is offering zero or very low down payment
Seller has increased interest or other offers on the property
Buyer just offered too little money in the first place
A minimum earnest money amount is sometimes found in the listing advertisement. New home builders may also have minimum up-front deposit requirements. Most states have very strict rules regarding the handling of earnest money deposits. The money is usually held in an escrow company account, title company account, buyer’s broker trust account, or seller’s broker trust account. It is always the buyer’s money in a transaction that goes through to closing. The earnest money is always applied to the down payment on the final closing documents. It is not a separate fee.
The earnest money is used to offset the buyer’s down payment in the transaction. The disposition (return) of earnest money in a dispute and failed transaction is also spelled out in state law and real estate regulations and contract law. The buyer and seller agree to mediate before going to court and taking further legal action. Mediation usually results in agreement by the parties as to how to distribute earnest money in the failed deal. In many cases just avoiding the cost of mediation will result in an agreement between the parties. In all cases, real estate agents, and brokers should place the highest priority on the handling of client funds.