What is earnest money and what part does it play in a real estate transaction?

Earnest money is a deposit paid by the homebuyer that’s considered a partial payment toward the purchase of the home. Typically, payment is made in the form of a check or electronic transfer and it’s usually held in the listing broker’s trust account, where it stays until closing or is released via another method (more on that below.)

Earnest money is due two days after final acceptance of the purchase agreement. Once the company holding the earnest money check receives it, it has three business days to deposit it into the trust account.

“Earnest money is a deposit paid by the homebuyer that’s considered a partial payment toward the purchase of the home.”

Contrary to popular belief, sellers cannot retain the deposit if the buyer backs out of the purchase during the inspection contingency period.  As long as the buyer provides a notice of cancellation in writing to the seller’s agent before midnight on the day of the inspection period’s expiration, the buyer is entitled to receive a full earnest money refund.  The reason for cancellation does not matter, nor does it matter whether the buyer did any inspection at all whatsoever.  

There are four ways earnest money is released. Two of these we’ve already mentioned:  At the closing of the property, and upon receipt of a written cancellation. The third instance is when one side files a statutory cancellation.   This occurs when one party refuses to sign the cancellation. In such cases, Minnesota statutes dictate that the earnest money is refunded to the buyer. The fourth is through a court order, and that is incredibly rare.

The customary earnest money amount is 1% of the purchase price. Whether it’s higher or lower is something the buyer and seller can negotiate.

If we can answer any more questions about earnest money or any other components of a purchase agreement, don’t hesitate to reach out to us. We’d love to help you.