Earnest money is a good faith deposit of funds that accompanies your offer if you are buying a home, condominium or other real estate. By depositing this money it establishes that you are serious.  Earnest money is not a legal requirement but the seller may not take your offer seriously or their real estate agent or attorney will recommend against them taking the house off the market until you come up with a deposit.

How much money should be deposited?

There is no legal set requirement as to the amount of money that should be deposited. The good faith deposit is dependent upon the agreed sale price of the real estate. Deposits vary and typically can range anywhere from 1 to 3 percent of the sales price. Typically you want your deposit to be large enough that your offer is taken seriously, but you do not want it to be so large that you put significant funds at risk.

Is the deposit refundable?

This will depend upon your real estate contract , so be sure to review this document very carefully. It is advisable that you consult a real estate attorney who can help ensure that your offer is written in a manner that protects your rights to the deposit.  Even if your money is refunded, you may not receive the entire amount. Often, third party fees are paid out of earnest money deposits. For example, if an appraisal has been completed on the property then the appraisal fee is going to have to be paid before money can be released to either of the parties. Check the laws in your state as some states have laws requiring the buyer and the seller to agree on the disbursement of these funds before they are refunded, which can lead to further problems and legal action.

Who holds the money?

The earnest money deposit should be made to a reputable third party that is agreeable to both the buyer and the seller such as a well known real estate brokerage, legal firm, escrow company or title company. As a buyer, be aware that if you allow earnest money to be held and deposited directly by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close for whatever reason.  To reduce the risk that the monies will be improperly used it is best to have real estate agents or attorneys hold the earnest money deposit as  they are licensed by the state and required to deposit the money in a trust or escrow account. To avoid the loss of your deposit, follow these tips.
• Never give an earnest money deposit to the seller.
• Verify that the third party will deposit the funds into a separately maintained trust account.
• Obtain a receipt.
• Do not authorize a release of your earnest money until your transaction closes.
• Ask how the money will be returned if necessary. Do they hold the check until it clears or return it?

Where does the money go before closing?

The purchase contract will indicate where earnest money will go. It should also specify the amount(s) to be paid, when the payments are to be made, where the money will be held and who is holding it. The contract will indicate as to if they money will be credited against the purchase price at closing, and what may happen to it if the transaction does not close.