What Is Earnest Money and How Does It Work in Minnesota?
A first-time buyer I was working with in Roseville sat across from me at a coffee shop in January, about two weeks before we found the home she eventually purchased, and asked me a question that I get in some version from almost every buyer I work with. “What exactly is earnest money? I keep hearing about it but I am not totally sure what it is, where it goes, or what happens to it if something goes wrong.” She was not embarrassed to ask. She was the kind of buyer who wanted to understand what she was doing before she did it, which is exactly the right approach to a transaction of this size. And the honest answer is that earnest money is one of those things that sounds more complicated than it is when you do not fully understand it, and much simpler than people fear once you do. Here is a complete and honest explanation of what earnest money is, how it works in Minnesota, and what you need to know before you write that check. The Basic Definition Earnest money is a deposit you make when you submit an offer on a home, delivered to demonstrate to the seller that your offer is made in good faith and that you are a serious buyer who intends to follow through on the purchase if your offer is accepted. It is sometimes called a good faith deposit, and that phrase captures its purpose well. The deposit signals to the seller that you are not simply submitting an offer to tie up their property while you continue looking at other homes. You are committing something real, money that has consequences if you walk away without a valid reason, to demonstrate the sincerity of your interest. When your offer is accepted, the earnest money does not go to the seller. It is held in escrow by a neutral third party, typically the title company handling the closing, until the transaction either closes or terminates. If the transaction closes, the earnest money is applied toward your closing costs or your down payment, effectively becoming part of the money you were going to bring to closing anyway. If the transaction terminates, what happens to the earnest money depends entirely on the circumstances of the termination and the specific terms of your purchase agreement. How Much Earnest Money Is Typical in Minnesota? There is no legally required amount of earnest money in Minnesota. The amount is negotiated between buyer and seller and varies based on the purchase price, the competitiveness of the market, the specific seller’s expectations, and local conventions in the community where you are buying. In most Twin Cities transactions, earnest money typically ranges from one to three percent of the purchase price. On a three hundred fifty thousand dollar home, that translates to roughly thirty-five hundred to ten thousand five hundred dollars. In highly competitive situations or higher price ranges, some buyers offer more to make their offer more attractive. Some sellers, particularly those dealing with multiple offers, explicitly state in their listing what earnest money amount they expect to see in strong offers. Your Realtor will advise you on what is customary and competitive for the specific market and price range you are purchasing in. Where Does the Earnest Money Go? In Minnesota, earnest money is typically deposited with the title company that will be handling the closing, though it can also be held by a real estate brokerage under certain circumstances. The key point is that earnest money is never sent directly to the seller. It is held by a neutral escrow party throughout the transaction, which protects both the buyer and the seller. The seller cannot access the funds while the transaction is pending. The buyer cannot simply withdraw them either. The money sits in an escrow account until the transaction resolves one way or another. When the timeline for depositing earnest money is written into the purchase agreement, it typically specifies that the earnest money must be deposited within a specific number of business days after offer acceptance, commonly two to three business days. Missing this deadline can be a breach of the purchase agreement, so it is important to move promptly once your offer is accepted. When Is Earnest Money Refundable? This is the question that generates the most anxiety among buyers, and the honest answer is that whether your earnest money is refundable depends entirely on why the transaction is terminating and what contingencies are in your purchase agreement. Contingencies are contract provisions that give you the right to exit the purchase agreement under specific circumstances without losing your earnest money. The most common contingencies in Minnesota purchase agreements are the financing contingency, the inspection contingency, and sometimes an appraisal contingency or a sale of buyer’s home contingency. If you terminate the purchase agreement within the terms of an active contingency, your earnest money is generally refundable. If you terminate without a valid contingency basis, your earnest money is at risk of being retained by the seller as compensation for the time their home was off the market. The financing contingency protects you if your mortgage loan is not approved. If you apply for financing in good faith and cannot obtain approval despite your best efforts, the financing contingency gives you the right to terminate the purchase agreement and receive your earnest money back. The inspection contingency gives you the right to have the home professionally inspected and to terminate the agreement if the inspection reveals conditions you are not willing to accept, within the timeframe specified in the purchase agreement. If you terminate within this window for a legitimate inspection-related reason, your earnest money is refundable. The appraisal contingency, which may or may not be included depending on your specific offer strategy and lender requirements, protects you if the home appraises for less than the purchase price and you are unable to negotiate an acceptable resolution with the seller. If all contingencies