What is earnest money? Earnest money is essentially a good faith payment which shows the seller that you are serious about buying their home. It's also part of your down payment. So for instance if you pay 5% in earnest money (abbreviated as EM) and your total down payment is 20% then that means you've already paid 5% of your down payment up front. So at closing you'd just pay the remaining 15% of your down payment plus your closing costs.
How much is earnest money? Typically in IL there are two earnest money payments. The first one is usually $1,000 if you're buying a property under $1M and $10,000 if you're buying a property over $1M. The first EM payment is usually due within 1 business day of both the buyers and sellers signing the contract. There is then a second earnest money payment due once we finish the inspection and contract negotiations which usually takes about 2 weeks once we go under contract. Usually that second earnest money payment is 5% of the purchase price for properties under $1M and 10% of the purchase price for properties over $1M. If your down payment is less than 5% we can negotiate a different amount for the earnest money.
Who holds the earnest money? Usually the earnest money is held by the real estate brokerage representing the seller. However, not all real estate brokerages are set up to hold earnest money. If the seller's real estate brokerage doesn't hold earnest money then often times either the buyer's real estate brokerage or the seller or buyer's attorney will hold the earnest money instead. Earnest money is typically deposited the day it is received so be sure that money is in your account when you drop off the check or wire the funds. The day before closing the entity holding your earnest money funds will then wire the funds to the Title company where your closing will take place.
Why do we pay earnest money? Without the requirement of earnest money, a real estate buyer could make offers on many homes, essentially taking them off the market until they decided which one they liked best. Sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.
Can I get my earnest money back if I cancel the contract? If you cancel the contract, the earnest money is usually refundable if you cancel while we are still in the attorney review time period, which is the time period where we are negotiating the inspection requests and contract changes which is usually for about 2 weeks once we go under contract. At that time, buyers have typically only paid the first earnest money payment which is usually $1K or $10K and it's returned to the buyers in about a week via a refund check. Once we've negotiated the inspection and attorney review changes and you've paid your second earnest money payment (usually 5% or 10% of the purchase price) that is your point of no return. If you simply change your mind about buying the home after that second earnest money payment is made you typically loose all of your earnest money. That said, if you cancel because your loan was denied, the property burned down, the property didn't appraise or because of another reason where your earnest money was protected in the contract then you'll usually get the full amount of your earnest money back.
Can I refuse to pay earnest money? You can but likely your offer won't be taking seriously then so it's not something we recommend. That said, if you are doing a %0 down payment loan like a Physician's Loan or a VA loan we may be able to negotiate to have you skip paying any earnest money since you aren't putting down any down payment.
If you have additional questions about earnest money just let us know!