What Is Earnest Money in Real Estate?

Every earnest money question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. A broker deposits a $12,000 earnest money check into her personal operating account, intending to move it to the trust account the following week. She has violated the duty of:

   • ADisclosure
   • BLoyalty
   • CAccountingcorrect
   • DConfidentiality

   Why: Handling other people's money (prompt deposit, accurate records, and no mixing with the broker's own funds) is the duty of accounting, and depositing it personally is commingling. Intent to move it later is not a defense.

   Agency

   Key term: trust account

2. 2. A broker discovers that one of her salespeople has been holding earnest money checks in a desk drawer for two weeks before turning them in. The broker's supervisory responsibility requires her to:

   • ATreat it as the salesperson's personal violation and take no action
   • BCorrect the practice, deposit the funds properly, and document the remedycorrect
   • CWait until a client complains before intervening
   • DDeduct any resulting fine from the salesperson's commission

   Why: A broker is responsible for supervising affiliated licensees and for the integrity of trust funds, so undeposited checks are her problem the moment she learns of them. Failing to act invites discipline against her own license, and shifting a fine onto the salesperson does nothing to protect the funds.

   Agency

3. 3. A buyer whose contract is contingent on obtaining a mortgage never submits any loan application, then demands the earnest money back when the financing deadline passes. The seller can most persuasively argue that:

   • Athe buyer breached by making no good-faith effort to satisfy the condition.correct
   • Bthe contingency is void because it benefited only one party.
   • Cthe deposit must be divided equally between the parties.
   • Dthe contingency automatically converted into an option to cancel.

   Why: A financing condition carries an implied duty to pursue the loan diligently, so a buyer cannot rely on a failure caused by doing nothing at all. A contingency is not a free look, and that distinction separates a lawful exit from a default.

   Contracts

4. 4. A broker receives a $12,000 earnest money deposit on a pending sale. Until closing, the broker must:

   • Adeposit it in the brokerage operating account and record it as a receivable.
   • Bhold the uncashed check in the transaction file regardless of any instructions.
   • Cplace it in a trust or escrow account kept separate from brokerage funds.correct
   • Dforward it to the seller as evidence of the good faith of the buyer.

   Why: Money belonging to others must sit in a trust or escrow account; mixing it with brokerage operating funds is commingling and is grounds for discipline. The deposit belongs to the transaction, not to the broker and not yet to the seller.

   Contracts

   Key term: escrow

5. 5. Which statement about earnest money is accurate?

   • AIt must equal at least 3% of the purchase price in order to bind the seller.
   • BIt becomes the property of the listing broker once the offer is accepted.
   • CIt is the consideration that makes a bilateral purchase contract valid.
   • DThe amount is negotiable, and it is normally credited to the buyer at closing.correct

   Why: No fixed percentage is required, and the deposit is customarily applied toward the price or the down payment at settlement. The mutual promises of the parties, not the deposit, supply the consideration in a bilateral contract.

   Contracts

6. 6. A buyer and seller sign a written agreement canceling their contract and returning the earnest money, putting each back in their original position. This is:

   • Areformation
   • Bnovation
   • Caccord and satisfaction
   • Drescissioncorrect

   Why: Rescission cancels the contract and restores the parties to where they stood before it. Reformation rewrites a document to match actual intent, and novation swaps in a new party or obligation rather than undoing the deal.

   Contracts

7. 7. A buyer hands the listing broker a $6,000 earnest money check when the offer is written. What governs how quickly that check must reach the trust account?

   • AThe brokerage policy manual, which may set whatever deadline the firm prefers
   • BThe lender, which schedules the deposit along with the appraisal order
   • CState license law, which sets a short deadline measured in banking dayscorrect
   • DA uniform federal rule requiring deposit within three business days of receipt

   Why: Deposit timing comes from state license law, which sets a short deadline measured in banking days, commonly running from acceptance. There is no uniform federal deposit rule for earnest money, so the three-business-day answer describes a requirement that does not exist.

   Practice of real estate

   Key term: trust account

8. 8. A buyer and seller agree in writing that the earnest money check will be held uncashed until the seller accepts the offer. Under generally accepted trust fund principles this is:

   • Aallowed only if the broker keeps the check in a personal safe deposit box until closing occurs
   • Ballowed automatically, because a check is not considered funds until someone negotiates it
   • Callowed when it is disclosed to the seller, with the deposit deadline then running from acceptancecorrect
   • Dnever allowed, because every instrument received must be deposited on the day the licensee takes it

   Why: Holding an instrument is allowed when it is disclosed to the seller, with the deposit deadline then running from acceptance. The claim that a check is not funds until negotiated is wrong: regulators treat a check received as trust property from the moment it is accepted.

   Practice of real estate