Earnest Money Explained: What Illinois Homebuyers Should Know

What Is Earnest Money?

If you’re preparing to buy a home, there’s one expense you’ll probably hear about early in the process: earnest money.

Earnest money is money a buyer provides as part of a real estate transaction to demonstrate their commitment to purchasing the property. You may also hear it referred to as a good-faith deposit.

According to Freddie Mac’s guide to homebuying costs, earnest money is generally held in an escrow account and can ultimately be applied toward your down payment or closing costs.

How Much Earnest Money Do You Need?

There’s no single amount that applies to every home purchase.

The amount, timing, and handling of earnest money depend on your purchase contract and transaction. That’s why it’s important to understand exactly what you’re agreeing to before signing an offer.

Buyers also shouldn’t assume earnest money is automatically refundable. Whether you can recover your deposit can depend on your contract, applicable contingencies, deadlines, and the circumstances surrounding the transaction.

What Happens to Earnest Money at Closing?

If the transaction proceeds to closing, your earnest money generally doesn’t disappear. Instead, it is typically credited toward the funds you’re responsible for bringing to the transaction.

Your final closing documents should show how previously paid funds are being accounted for. The Consumer Financial Protection Bureau’s Closing Disclosure explainer can also help buyers understand the costs and figures they’ll see before closing.

The Bottom Line

Earnest money may seem like one small part of purchasing a home, but understanding where your money is going is an important part of becoming an informed buyer.

Every transaction is different, so make sure you understand your specific contract, deadlines, and obligations throughout the process.

Have questions about buying a home in Illinois? Go With Mason and let’s make your next move happen.