Understanding Earnest Money

Whether you’re a first time home buyer or it’s been a while since you purchased your last home, you may find some of the real estate terminology confusing. After your house hunting has finally led you to find the home of your dreams, it’s time to get the purchasing process started. One of the first steps is to make an offer on the home, which is often accompanied by earnest money.

What is Earnest Money?

Simply put, the earnest money is a ‘good faith’ deposit. By definition, earnest means serious or sincere. In real estate, including earnest money along with an offer shows the seller you’re serious about buying the house. Including earnest money with an offer isn’t mandatory but it can be very beneficial, especially if there are multiple offers on the home.  When considering multiple offers, the seller will typically bypass an offer that isn’t accompanied by earnest money. 

How Much is Necessary?

This can vary depending on market conditions, location, and other factors. While not legally required in New Jersey, earnest money is a two-step process in the state. A smaller deposit will accompany the initial offer, usually around $1000. Once the offer is accepted, a larger deposit, typically 10% of the purchase price is submitted when the purchase agreement is signed. An experienced realtor will be able to advise you on what is appropriate for the current market and the area in which the house is located.

What Happens to the Money?

When the initial offer is made, the earnest money is held by a neutral third party. This party is normally the buyer’s attorney, a real estate brokerage, or an escrow agent. If the offer isn’t accepted, the money is returned to the buyer. If the offer is accepted, the earnest money is held in escrow until closing, when it will be applied to the purchase price.

Is Earnest Money Refunded If the Buyer Backs Out?

This varies from state to state and it can also depend on the specific agreement between the buyer and the seller. Here are three circumstances where the buyer can back out in New Jersey and still get their earnest money back.

Attorney Review – Once the buyer and seller have signed the purchase agreement, both parties are entitled to have the contract reviewed by their prospective attorneys. During the attorney review period, either party can decide to back out for any reason. The buyer can simply decide they are no longer interested in buying the home. In the interim, the seller may receive a better offer and is no longer willing to accept the offer previously agreed upon. In either case, the agreement can be canceled and the earnest money returned to the buyer.

Inspection Results – It is the buyer’s right to have a home inspection before moving forward with the purchase. The standard home inspector’s report will cover the condition of the home’s roof, foundation, basement, walls, ceilings, floors, windows, doors, and attic, including any visible insulation. It will also include the inspection of the HVAC system and the interior plumbing and electrical systems. Inspections for termites, mold, radon and lead-based paint may also be conducted. Once all inspections are complete, the buyer may feel that the seller should address any issues the inspector may have discovered. If the seller refuses, the buyer can walk away from the sale with their earnest money.  

Getting a Mortgage Commitment – In the purchase agreement, there is a section called the Mortgage Contingency Clause. Contingencies are conditions or actions that must be met for a real estate contract to become binding. These can vary depending on the details of your specific agreement but there is one standard contingency – the mortgage commitment. This states that the buyer will obtain a definite mortgage commitment by a certain date. If they fail to do so, either party can cancel the contract and the buyer will have their earnest money returned to them.  

Keep in mind, while you can get your money back if you can’t come to terms on the items discussed above, if the buyer hasn’t acted in good faith and is considered in breach of contract, the seller can take you to court to recover damages. It is always a good idea to consult with your attorney before backing out of a real estate contract.

Real Estate Professionals

When buying or selling a home, you should always work with a real estate agency that is experienced and has built a solid reputation in your location. On LBI in New Jersey,  that real estate agency is The Freeman Group. Over the last 24 years, we have earned a well-deserved reputation as the premier real estate company on Long Beach Island. Our team has completed hundreds of successful transactions establishing as the most productive and result-driven realtors in Ocean County.  Whether you’re interested in buying, selling or investing in Jersey Shore real estate, contact us today.

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