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Ask a Realtor – What is Earnest Money

What is Earnest Money?

As defined by Forbes, “Earnest money is what you put down before closing to show that you’re serious about purchasing the house so that the seller can confidently stop showing it to other potential buyers.’ The earnest money is provided by the buyer meant to signal their intent, good faith, to buy a home. Just pure and simple like that. Here, in Missouri, the earnest money is secured by a third-party company non-other than the Title company. And, at the end of purchase or the Closing of the contract, it is applied to the purchase price. Following this, few questions come into the Buyer’s or Sellers’ minds. And that is what are we going to tackle in this article.

Who owns the earnest money? Is it the buyer? or the seller?

That money isn’t the buyers and isn’t the sellers during the transactions. It is the transaction money more or less.

What will happen to earnest money if the Contract falls apart?

Both parties need to agree on what will happen to the earnest money. Which will be laid out in a contract called “Mutual Release”. This contract states what part of the money goes to which parties would also require their sign. A proof that they have agreed on what states in the contract.

What will happen if the Buyer or the Seller doesn’t agree on how the money will be dispersed?

Three things can happen:

1.)   A civil action is filed to determine the disposition, so someone else decides through that court or through that civil action.

2.)   The second thing is a court order or final judgment can mandate disposition of that money

3.)   And, the third thing is the default which is the disposition that happened base on default required by law in the area.

The next question is “What is the timeframe for this process? I never run into Civil Action or Court Order or Disposition by Law but what ends up happening is the Escrow will hold that money and if the contract falls apart Escrow money is being delivered to the State treasure. In the contract, we use here in the State of Missouri, the contract states,” the escrow holder is hereby authorized by the court to report and deliver any Escrow money to the state treasurer at the time following 60 days after initial projected closing date”. So, for instance, you are entering into escrow, you are entering into under contract status on December 1st, and are supposed to close on December 31st. Well, let’s say that the contract falls apart on December 15th for whatever reason, maybe its inspection related, maybe it’s appraisal-related or, maybe you’re supposed to have a job transferred and it didn’t go through. Then, 60 days after, the projected closing date which is December 31st then the escrow company decides what will happen to the escrow money. And typically, after 365 days it will go back to the state. There’s a lot of rules of how it’s all laid out or who pays what and how’s that works. In most cases, the agreement can be reached in a couple of months. Here in the state of Missouri, there are multiple places within the contract that read, that earnest money should be returned to the buyer. So, it’s safe to say that our contracts really weigh heavier on the buyer.

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