General information, not legal advice

Earnest Money in Tennessee

When you make an offer on a home in Manchester or anywhere in Coffee County, one of the terms you will set is the earnest money. Buyers want to know how much to put down and whether they can get it back. Sellers want to know what it protects. This guide explains how earnest money works, using the Tennessee Real Estate Commission (TREC) rules, the Tennessee Code and plain language from the Consumer Financial Protection Bureau (CFPB).

This is general information, not legal advice. Your purchase contract controls how your earnest money is handled. For legal questions about your contract, please talk with a Tennessee attorney.

What earnest money is

The CFPB defines earnest money as a deposit a buyer pays to show good faith on a signed contract to buy a home. It is held by the seller or a third party, such as a real estate agent or title company. If the sale closes, the earnest money may be applied to closing costs or the down payment. If the contract ends for a reason the contract allows, it is returned to the buyer. If the buyer does not perform in good faith, it may be forfeited and paid to the seller.

The National Association of REALTORS says no law requires an earnest money deposit with an offer, but it is a common practice, and some sellers ask for one or look more favorably on offers that include one.

How much earnest money?

There is no set amount in Tennessee law. The amount is negotiated between the buyer and seller and written into the purchase contract. It can depend on the price, the type of property, how many contingencies the offer has and what the seller is asking for. I am glad to talk through what is common for the kind of home you are looking at in Manchester and Coffee County before we write your offer.

Who holds the money

Your contract says who will hold the earnest money. It might be a real estate firm, a title company or a closing attorney. TREC Rule 1260 02 .09 sets the rules when a real estate firm holds it:

• A separate escrow or trust account. Each principal broker must keep a separate escrow or trustee account for money that belongs to others. Mixing that money with the firm's own funds, called commingling, is prohibited.
• The agent hands it over right away. An affiliate broker who receives earnest money must pay it over to the principal broker immediately.
• The contract spells it out. When the contract lets the principal broker hold the money, the contract must clearly state the terms for paying it out and the name and address of whoever will actually hold it.
• A named escrow agent. If the contract names someone other than the principal broker to hold the money, such as a title company, the principal broker is relieved of responsibility once that escrow agent receives it.

Tennessee law adds more protection. Under Tenn. Code Ann. section 62 13 403, every licensee owes all parties the duty to timely account for trust fund deposits. Under section 62 13 321, brokers must keep records of their escrow accounts for at least three years, showing who deposited the money, the dates it came in and went out and who was paid.

When it is due

Your contract sets the deadline, so read that part carefully. TREC Rule 1260 02 .09 says earnest money held by a firm must be deposited into the escrow account promptly after the offer is accepted, unless the offer states a specific deposit deadline. The rule also says a postdated check cannot be accepted unless the offer allows it.

Missing the deadline in your contract can cause problems, so put it on your calendar the day your offer is accepted. My home buyer checklist has a spot for it.

How it is applied at closing

When the sale closes, your earnest money is credited to you. The CFPB says your Closing Disclosure lists the amount of your deposit in the section for money already paid by or on behalf of the borrower, along with your loan amount and any seller credits. That lowers your cash to close, the amount you bring to the closing table. My buyer closing costs guide walks through the rest of the Closing Disclosure.

When a buyer can get it back

Whether the money goes back to the buyer depends on the contract. The NAR consumer guide says earnest money is returned to the buyer if the seller stops the sale, or if a contingency in the contract, such as the home inspection, appraisal or financing, cannot be resolved. It also says a buyer may lose the deposit by waiving contingencies too early, missing deadlines or walking away from the sale for other reasons.

A few things to know:

• Contingencies and deadlines matter most. Most refunds come down to whether a contingency applied and whether notice was given on time and in the way the contract requires. Track every deadline in your contract.
• Some earnest money is nonrefundable. Tennessee REALTORS says nonrefundable earnest money is an acceptable legal concept in Tennessee, and its forms include a special stipulation the parties can add if they both agree. Read any such clause carefully before you sign.
• Get it in writing. If a sale is ending, the parties can sign a separate written agreement saying where the money goes.

Under TREC Rule 1260 02 .09, a principal broker may pay out earnest money at closing, under a reasonable interpretation of the contract, under a separate written agreement signed by everyone with an interest in the money, when an offer is rejected, when an offer is withdrawn before it is accepted, after filing an interpleader action in court or under a court order.

What happens in a dispute

Sometimes the buyer and seller do not agree on who should get the earnest money. TREC Rule 1260 02 .09 says that, unless there is a compelling reason, earnest money must be paid out, interpleaded or turned over to an attorney with instructions to interplead it within 21 calendar days after the holder receives a written request to disburse it.

Interpleader is a court process. The party holding the money brings everyone who claims it into one case, and the court decides who is entitled to it. A few other points:

• Tennessee REALTORS says earnest money disputes are not a proper subject for its arbitration process.
• TREC can discipline a licensee who fails to account for or pay over money that belongs to others within a reasonable time, under Tenn. Code Ann. section 62 13 312. But TREC says it cannot recover or order a refund of money for you. That takes a civil lawsuit.
• If you are facing an earnest money dispute, talk with a Tennessee attorney about your contract and your options.

For sellers

Earnest money shows the buyer is committed, but the terms around it matter as much as the amount. When you review an offer, look at who will hold the deposit, the deposit deadline and the contingencies and deadlines that could let the buyer get it back. My how to sell a house guide explains how I help sellers compare offers.

Protect your money from wire fraud

The CFPB warns that scammers send fake emails that look like they come from your agent or closing agent, with false instructions for wiring money. To protect your earnest money and your closing funds:

• Confirm payment instructions in person or by phone, using a number you already know, before you send any money.
• Never follow wiring instructions that arrive only by email, and be wary of last minute changes.
• Do not send account numbers or other financial information by email.
• If you think you sent money to a scammer, call your bank right away and ask for a wire recall, then file a complaint with the FBI Internet Crime Complaint Center at ic3.gov.

Questions to ask before you write an offer

• Who will hold the earnest money, and what is the name and address of the holder?
• When is the deposit due, and how should I pay it?
• Which contingencies are in my contract, and what are the deadlines?
• Is any of the deposit nonrefundable?
• How will my earnest money show up on my Closing Disclosure?

Keep reading:

• Buying a home in Manchester, step by step
• Buyer closing costs in Tennessee
• First time home buyer help in Tennessee
• Home inspections in Tennessee
• Printable home buyer checklist
• Real estate glossary for buyers and sellers
• All Manchester guides

Questions about earnest money on a Manchester home?

I help buyers and sellers across Manchester and Coffee County set earnest money terms that fit the deal and keep every deadline on track. Call or text me at (615) 497 1658, or request my buyer guide below and tell me what you are looking for.

Common questions

Matt Sargent is a Tennessee licensed affiliate broker with Keller Williams who helps buyers and sellers in Manchester and Coffee County. Call (615) 497 1658 or send a message.