Earnest Money in Tennessee: What Buyers and Sellers Need to Know

If you are buying or selling a home in Tennessee, you have probably heard the term "earnest money." It is one of those real estate terms that sounds more complicated than it really is.

So, what is earnest money?

In simple terms, earnest money is a deposit a buyer makes as part of a real estate transaction to show they are serious about purchasing the property. The amount and timing of the deposit are negotiated as part of the purchase agreement, and the agreement explains what happens to the money during the transaction.

For buyers and sellers, understanding how earnest money works can make the process feel a whole lot less confusing. Let's break it down!

What Is Earnest Money?

Earnest money is a deposit made by the buyer after the parties have a binding purchase and sale agreement. Think of it as money that says, "I am serious about moving forward with this purchase."

The amount is not necessarily a set percentage of the purchase price, and it is negotiated between the buyer and seller and written into the purchase agreement.

In Tennessee, the purchase agreement also establishes important details about when the earnest money must be received and who will hold it. That means the purchase agreement is the place to start when you have questions about a specific earnest money deposit.

Is Earnest Money the Same as a Down Payment?

No.

This is one of the most common points of confusion for buyers. Your earnest money deposit and your down payment are two different things! The earnest money is deposited earlier in the transaction. Your down payment is part of the money you bring to the table to complete the purchase at closing.

If the transaction successfully closes, the earnest money is generally applied toward the purchase price according to the terms of the agreement. In other words, it can become part of the money being credited toward the buyer's purchase rather than being an additional expense.

For example, if you put down earnest money when your offer is accepted, that money does not simply disappear when you reach closing. It is accounted for as part of the closing process.

When Is Earnest Money Deposited?

This is where paying attention to the purchase agreement really matters!

Earnest money is typically due within a specific number of days after the agreement becomes binding. The exact deadline depends on what the parties agreed to in the contract.

It is important for buyers to understand that this is a real deadline!

If earnest money is not received on time, the contract may provide a process for addressing the missed deadline, including notice to the buyer and an opportunity to deliver the funds. Failing to follow the agreement can potentially put the buyer in default.

The best advice is simple: know your deadline and make sure your Realtor knows the status of your deposit.

Who Holds the Earnest Money?

The earnest money does not typically sit in the buyer's or seller's personal bank account. Instead, it is held by an authorized holder according to the purchase agreement. Depending on the transaction, that may be a real estate broker, title company, or another authorized escrow holder. This is an important detail because the person or company holding the funds has specific responsibilities and procedures for handling them.

At Hywater Title, we know that keeping track of the money is just one piece of a much larger closing process. Clear communication between the buyer, seller, Realtors, lender, and closing team helps keep everyone on the same page.

What Happens to Earnest Money at Closing?

This is the easy part - When the transaction successfully closes, the earnest money is generally applied toward the purchase price according to the terms of the purchase agreement. It becomes part of the financial picture at the closing table.

Your closing statement or settlement statement will account for the earnest money so that the funds are properly credited as part of the transaction.

This is one reason it is important for the closing team to know about the deposit and have accurate documentation for the transaction.

When Can a Buyer Get Earnest Money Back?

This is where things can get a little more complicated. Whether a buyer receives earnest money back depends on the purchase agreement and what happens during the transaction.

Many purchase agreements include contingencies that give a buyer certain rights if specific conditions are not met. Depending on the terms of the agreement, examples may include situations involving inspections, financing, appraisal, title issues, or other negotiated contingencies.

If a buyer properly exercises a contractual right to terminate the agreement, the contract may provide for the earnest money to be returned. The important word here is "properly."

A buyer should not assume that simply changing their mind means they automatically get their earnest money back. The rights of the buyer and seller depend on the actual contract and the circumstances surrounding the termination.

When Could Earnest Money Be Forfeited?

Earnest money can potentially be at risk when a buyer fails to follow the terms of the purchase agreement or terminates the transaction without a contractual right to do so.

For example, if a buyer backs out after their contractual protections have expired, the seller may have a claim to the earnest money depending on the agreement.

Tennessee purchase agreements can also contain specific provisions addressing nonrefundable earnest money. That is why it is important not to think of earnest money as simply a "refundable deposit." Its treatment depends on the contract.

If a dispute arises, the person holding the funds may not be able to simply hand the money to whichever party asks for it. The contract, written agreements between the parties, and applicable procedures can all play a role in determining how the funds are handled.

If you have a legal question about your rights under a specific contract, your own attorney is the appropriate person to advise you.

Why Do the Contingencies Matter So Much?

This is one of the biggest reasons buyers should understand their purchase agreement before they sign it!

A contingency is essentially a condition or protection written into the agreement that can give a buyer the right to take certain actions if specific circumstances occur.

For example, a contract may provide the buyer with certain rights related to inspections or financing.

The important thing is not just knowing that you have a contingency. You also need to know the deadline associated with it and what steps are required to exercise your rights. Miss a deadline, and the outcome can be very different!

Your Realtor can help you understand the business terms and deadlines in your agreement, while your attorney can provide legal advice about your rights and obligations.

What Role Does the Title Company Play?

By the time you reach closing, there are a lot of moving pieces.

Your Realtor is helping coordinate the transaction. Your lender is working through the financing. The title and closing team is working through title, documents, funds, and the details needed to get everyone to the closing table.

Earnest money is one part of that bigger picture.

When a title company is holding the earnest money, the closing team needs accurate information about the deposit so it can be properly accounted for during the Tennessee real estate closing. Good communication matters here.

If there is a question about where the earnest money is, whether it has been received, or how it should be handled, the best thing to do is ask early rather than wait until closing day.

The Bottom Line on Earnest Money in Tennessee

Earnest money can feel intimidating when you first hear about it, but the basic idea is pretty simple.

• A buyer makes a deposit to show they are serious about purchasing the property, and the money is held according to the purchase agreement and is generally applied toward the purchase price if the transaction closes.

• If the transaction does not close, what happens to the earnest money depends on the purchase agreement, the reason the transaction ended, and the rights and obligations of the parties.

That is why your purchase agreement matters so much!

If you are buying or selling a home in Tennessee and have questions about earnest money, do not guess. Talk with your Realtor about the terms of your transaction and reach out to your title company with questions about the closing process.

At Hywater Title, we are always happy to help make the closing process a little easier to understand. Because when you know what is happening with your money, your deadlines, and your closing, you can head to the closing table with a lot more confidence!

Frequently Asked Questions About Earnest Money in Tennessee

1. Is earnest money required when buying a home in Tennessee?

Not necessarily. The amount and whether earnest money is required are negotiated as part of the offer and purchase agreement. The contract will outline the agreed upon amount and deadline.

2. Does earnest money count toward my down payment?

Earnest money is different from your down payment, but when the transaction closes, the earnest money is generally credited toward the purchase price according to the terms of the agreement. Your closing documents will show how the funds are being applied.

3. Who holds earnest money in Tennessee?

Earnest money may be held by a real estate broker, title company, or another authorized holder, depending on the terms of the purchase agreement.

4. Can I get my earnest money back if I cancel the purchase?

Maybe. It depends on the purchase agreement and the reason for termination. Certain contractual contingencies may allow a buyer to terminate and receive the earnest money back, while terminating outside of the buyer's contractual rights could put the deposit at risk.

5. What happens if the buyer and seller disagree about who gets the earnest money?

The funds may not be immediately released to either party. The holder will follow the applicable contract and procedures for handling the dispute. If you believe you are legally entitled to the funds, an attorney can advise you about your specific situation.