Earnest money refers to a home buyer’s deposit on a home that he or she is in contract to purchase.  It’s often called an earnest money deposit, initial deposit, or good faith deposit in Silicon Valley.  The terms are all interchangeable.

How much is the earnest money?

In the San Jose & Los Gatos areas, and Santa Clara County generally, the earnest money is usually 3% of the purchase price of the home.  It is placed in an escrow account, which is usually at a title company (in northern California that’s how it is handled – in Southern California, often there is a separate escrow company).

Ordinarily, funds are due within 3 business days of acceptance of the contract, but that can be changed (it’s one of the few places where the CAR and PRDS contracts reference business days rather than calendar days). Some listing agents will counter back that funds need to be in title the next day after the offer is ratified. Some buyers may request more than 3 days if their funds are coming from abroad.  With competitive, multiple offer situations, buyers should anticipate needing to get the money to title fast and have it ready to go before the offer is presented so that they aren’t at a disadvantage.

Is a cashier’s check required for the good faith deposit?

The initial deposit does not have to be a cashier’s check, however, some listing agents and sellers may request that in a counter offer.  That’s most likely to happen in a very competitive multiple offer frenzy, and unlikely to happen if it’s just one or two bids.

Increasingly, the funds today are wired to title, but in some cases, buyers may instead write a check. For the earnest money deposit, it may be a personal check. (At the end of escrow, it must be either a cashier’s check or a wire to bring the balance of the down payment to title. Both of these are referred to as “good funds”.)  It is important for home buyers to draft the check  correctly (not made out to just “title company”, for instance), and to understand that this isn’t a check that just sits in a drawer.  The check for the initial deposit is cashed by the escrow company as soon as they get it.  Real estate brokerages tend to prefer that Realtors don’t touch the buyer’s funds, so many are encouraging that consumers wire in funds rather than hand a check to a real estate agent.

Phishing and wire fraud is a concern, so when sending funds in electronically it is extremely important to phone the title company and verify the specific instructions.

Does the earnest money count as part of the entire down payment?

Yes, if the buyer is putting 20% down on some real estate, the initial deposit is likely to be 3% and the balance of the down payment will be 17%.  The balance of funds will need to be in escrow a couple of days before closing.  Many lenders will not fund the loan on the property until and unless the buyer’s money is in escrow first.

Can the buyers get the initial deposit back if they change their minds about buying the home?

This is not a “one size fits all” question.  If the buyers have contingencies, it may be possible to back out of the transaction and have the full deposit returned.  If the buyer has written an offer with no contingencies, that may be an uphill battle, and time to consult with a real estate attorney, as Realtors are not qualified nor allowed to provide tax or legal advice.

Related Reading:
What is escrow? (on popehandy.com blog)
What do international home buyers need to know about financing a real estate purchase in the United States? (on Move2SiliconValley.com – relocation site)