Blog Post

What Is Earnest Money for?

Michael Weitzman • Oct 31, 2014

Part of the role of a Grand Rapids real estate agent is to guide a buyer or a seller through the intricacies of a real estate transaction in Michigan. One step along the negotiation process is the earnest money deposit, which is paid by a buyer to signal their intention and ability to carry out the purchase contract.

The amount of earnest money is normally 1-2% of the purchase price of the home. In some circumstances, a buyer may offer a higher earnest money deposit to make their offer more attractive. The earnest money deposit is normally made as soon as both the buyer and the seller sign an offer to purchase a home. Since offers are often contingent on inspections, financing, and appraisals, there are normally clauses in the contract that specify circumstances when earnest money would be returned. Often the contract provides for forfeiture of the deposit if the buyer defaults on the contract.

From the buyer’s perspective:

  1. Earnest money lets the seller know the buyer is serious.
  2. It takes the home off the market, so no further offers can be entertained until the contract is completed.
  3. Eventually the deposit is used towards the purchase of the home, to help fund the down payment and closing costs. In other words, the earnest money deposit is not an extra cost of buying a home, because it will eventually be credited towards the purchase of the home at closing.

From the seller’s perspective:

  1. The deposit assures the seller that the buyer hasn’t made offers on multiple properties.
  2. In the event that the buyer backs out for some reason that is not covered by contingencies, the earnest deposit provides the seller compensation for the time the home was off the market.

In Michigan, earnest money is kept in a separate escrow account (usually by the seller’s broker, but sometimes by a title company or another third party) until the sale is either completed or canceled. If the contract is not completed, both the buyer and the seller must agree before the earnest deposit is returned.

Whenever you’re buying or selling, it’s a good idea to get a refresher on each step of the home buying process, including earnest money deposits. Be sure to ask your Grand Rapids real estate agent to explain the circumstances around your earnest money deposit, and don’t hesitate to ask questions! Find an experienced Grand Rapids real estate agent with a history of happy clients , and make the real estate process easy on yourself!


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