Earnest Money… what is it, how much is it, can you lose it?

What is Earnest Money?

Earnest money is a cash deposit submitted at the time of coming to an agreement to purchase a property that shows the home seller that the buyer is committed to the purchase. I think of it as “I’m serious” money. It is usually held in the listing broker’s escrow account and is credited back to the buyer at closing, a deposit which applies to buyer’s cash needed to close.

Current Minnesota purchase agreements state that earnest money shall be deposited in the trust account of the earnest money holder no later than two business days after the final acceptance date and deposited within three business days of receipt of said earnest money. Most of the time earnest money funds are now transferred electronically via TrustFunds, making compliance much easier.

The purchase agreement is still valid without receipt of earnest money, but if the earnest money isn’t received as prescribed in the purchase agreement the contract is in breach. This gives the seller a basis for declaring the purchase agreement cancelled and pursuing signing of a cancellation if desired.

How much is the earnest money deposit?

A typical earnest money deposit is 1-3% of the purchase price, but sometimes buyers submit a higher amount to make their offer more attractive (especially in multiple offer situations). If the buyer is paying cash, the seller may expect a larger earnest money deposit as security that the buyer won’t back out.

Can you lose your earnest money?

In the early days of earnest money deposits it was a guarantee to the seller that if the buyer backed out for any reason and the transaction did not close the seller would get to keep the earnest money. Now most purchase agreements include contingencies under which the agreement may be cancelled and earnest money returned to the buyer.

Contingencies in Minnesota

  • Inspection – many purchase agreements are contingent upon inspection(s) at buyer’s cost; buyer has the right to cancel and have earnest money refunded during this period
  • Right of Rescission – if purchasing a property that is part of a CIC (Common Interest Community such as a condo or townhouse) the buyer has 10 days to review association documents and financials to their satisfaction and has the right to cancel and have earnest money refunded during this period
  • Financing – if not paying cash, most purchase agreements are subject to financing
    • If buyer cannot secure financing the purchase agreement is cancelled and earnest money refunded to buyer or forfeited to seller per the terms of the purchase agreement
    • OR (often required by seller to come to an agreement)
    • Buyer’s lender must provide a Written Statement stating that the loan is approved, including a satisfactory appraisal, and any conditions required to close the loan, usually about a week prior to closing to give sellers confidence that the loan will close on time. Once this approval is delivered, if the transaction does not close for ANY REASON related to financing the seller has the option to declare the Purchase Agreement cancelled, with earnest money forfeited to seller as liquidated damages.

If the buyer simply changes their mind about the purchase and backs out after all contingencies have been met, buyer’s earnest money is usually forfeited to the seller as compensation for damages… seller has lost valuable market time and must begin the process of listing the property for sale again.

Sharlene Hensrud, RE/MAX Results – shensrud@homesmsp.com

Written By

I love what I do! Highly insightful, analytical and creative, there is nothing I love more than helping you find the right solution for your real estate transition. My mission is to serve my clients with honesty and integrity, exceeding their expectations in service and support… and to help others by donating a portion of every transaction to Habitat for Humanity.

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