Definition of "Earnest money"

Stephanie  Herbert real estate agent

Written by

Stephanie Herbertelite badge icon

RE/MAX Action

The logical definition of both words is almost enough to understand what is earnest money. Money is a form of exchange between people to assert value to something and Earnest equals something that shows or results from a sincere and intense conviction.

You see where this is going? The term earnest money – also known as “ good faith money” - is used in real estate to refer to an exchange that shows a sincere intense conviction of both buying a house and selling a home.

Here’s how it comes into play:

When a home buyer and a home seller agree to a fair market value, both parties make a contract to stipulate the final price of the house and the down payment. However, this contract doesn’t obligate the home buyer to purchase the home. Why? Well, the home inspection and the home appraisal may reveal structural problems and he/she will be able to say “hey; with these problems I don’t want to pay that much”. But the contract does obligate the Home Seller to take the house off the market in the meantime, so the earnest money transaction was created as a way to protect both parties: the home buyer can rest assured the home seller won’t be able to hear and accept other offers; whatever they agreed to will be what he/she will pay. And the Home Seller can rest assured that he’s not wasting time, after all the prospective home buyer has put a considerable amount of money on the table; it’s not a crazy ploy from a neighbor who’s also selling a home in order to hold people from making offers and driving them to his/her own house.

Typically, the earnest money is deposited into a trust or an escrow account. And, should something go wrong and the deal falls through, there are some stances where the home buyer will get the earnest money back and some others where the home seller will. If everything goes smoothly the way it should, the earnest money becomes part of the down payment to the house.

Real Estate Tips:

Don’t spend your hard earned earnest money without knowing exactly what you’re doing! Find a real estate agent that will go through the little details we don’t pay attention to amidst all the closing excitement.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

The meaning of a guarantee covers a legal and financially-binding agreement signed between three parties involved in real estate or financial transactions. In this document, typically ...

Tax-free exchange that allows a seller two years after escrow closes on his former principal personal residence to buy like-kind property and defer taxes. Profits from the sale of a ...

(1) Cash revenue from product sales or services rendered less cash expenses. It is different from accrual earnings. (2) The money available after deducting operating expenses and mortgage ...

House designed and zoned for one-family use. Other dwellings may be attached to a single family dwelling, but do not share the same plumbing, heating, or electrical system. Single family ...

Word, or group of words, that identifies a business or one of its products. The name is registered with U.S. Patent Office and provides legal protection for an indefinite number of renewals ...

In short, an overage means a surplus or an excess of money. An overage can present itself at a property at an auction where the asset has gone over the asking price. Suppose there’s a ...

Privilege of a real estate investor or lender to participate in the profitability generated from property. This is in addition to any principal, interest, or dividends. ...

Market Analysis in the Real Estate Market is basically research done concerning specific properties in relation to the overall current climate of the real estate industry. A good ...

Giving of a promise or guarantee to the receiver to instill confidence. ...

Popular Real Estate Questions