Understanding Earnest Money: Who Holds It and When You Get It Back

Introduction to Earnest Money

Earnest money, also known as a good faith deposit, is a crucial step in the home buying process. It is a deposit made by the buyer to the seller to demonstrate their commitment to the purchase. This money is typically held by a realtor, attorney, or escrow company until the transaction is completed or canceled due to unforeseen circumstances.

Types of Earnest Money

As Adrian explained, earnest money can be considered a form of escrow deposit or good faith money. This deposit serves multiple purposes, such as providing the buyer extra time to obtain financing, conduct a title search, property appraisal, and inspections. The amount of earnest money can vary depending on the local regulations and the terms agreed upon by both parties.

Earnest Money in California

In California, the earnest deposit, often referred to as the initial deposit, amounts to 3% of the purchase price. This deposit is usually paid when the buyer enters into a Purchase Agreement. The title company in Northern California holds this initial deposit in escrow. Buyers should note that they might not get this money back except in specific circumstances, such as if the buyer cancels the contract without a valid reason.

Who Holds the Earnest Money?

Earnest money is typically held by a realtor, attorney, or a title company in a specially designated escrow account to prevent any misappropriation or hanky-panky. This arrangement ensures that the money is secure and accessible only when needed according to the terms of the contract. While IOUs or personal checks can sometimes be used as earnest money, certified checks, and electronic transfers are more common and secure methods.

What Happens to Earnest Money?

The fate of earnest money depends on various factors. If a buyer decides not to proceed with the purchase despite the offer having been accepted, the earnest money is usually forfeited to the seller. This serves as compensation for the seller's lost opportunity during the period the property was off the market.

Conversely, if the contract is settled and the buyer completes the purchase, the earnest money goes toward the purchase price. In cases where the seller fails to fulfill the deal, the escrow company will return the earnest money to the buyer. While there are no fixed time periods for this process, it typically happens once the seller provides notice to the escrow holder.

Conclusion

Earnest money is a fundamental part of real estate transactions, ensuring that both buyers and sellers are committed to the transaction. Understanding who holds the earnest money and when it is returned is crucial for buyers to make informed decisions. If you have any questions or concerns, consulting with a legal professional or a real estate agent can provide valuable guidance.