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Understanding Earnest Money: It’s all about commitment

(Note: each state and municipality adheres to a standardized process for residential real estate transactions, including earnest money disposition and escrow management. This blog entry is written relative to the Missouri Realtor-approved residential real estate contract and the process that is customary here in Mid-Missouri.)

Earnest money is just what it sounds like. It’s a good faith deposit made by a buyer to convey an “earnest” desire to purchase the home for which an offer has been written. While earnest money isn’t technically required, a buyer’s failure to include earnest money in an offer can be viewed by the seller as a lack of sincerity or commitment to the property. Earnest money also serves to protect the interests of each party as they move through the transaction (more on that, below).

It’s all about commitment

Missouri doesn’t require any specific amount of earnest money; however, a general rule of thumb is 1.0% to 1.5% of the contract price. Generally speaking, the greater the earnest money the greater the buyer’s desire and commitment to complete the transaction. Most sellers will look favorably on a higher earnest money amount, particularly if there are multiple offers on the property. Supply and demand in a particular market can also impact the amount of the earnest money deposit. Ultimately, the final amount of the deposit is whatever the parties agree upon.

Once the contract is negotiated, accepted and signed by both parties, the buyer has a set number of days specified in the contract – typically five in Missouri – to deposit their earnest money with the escrow agent. An escrow agent is a third party (also specified in the contract) – usually the title company or the buyer’s broker – who holds the funds in a non-interest-bearing account until closing.

If the transaction successfully makes it to the closing table, the earnest money is credited to the buyer, reducing their “cash to close” by the corresponding amount. In most cases, buyers are eligible to terminate the contract and have their earnest money returned if problematic issues arise during one of the four main contingency periods: inspections, appraisal, financing, and title search. If the proper protocol as outlined in the contract is followed within the stated time period, the buyer is entitled to their earnest money. However, if the contingencies and the associated timeframes are not managed properly, or if the buyer attempts to terminate the contract without cause, the seller could be entitled to receive the earnest money. This is one of the biggest reasons why it is so important to use the services of an experienced, vigilant Realtor who does everything they can to protect your interests!

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