What Is Earnest Money?
Earnest money is an initial deposit put down by a potential home buyer when submitting an offer to purchase a house. It shows the seller that the buyer is serious about the purchase and is willing to put up money as collateral to ensure the sale. This article will provide an overview of what earnest money is and why it’s important in the home buying process.
What Exactly Is Earnest Money?
Earnest money is a sum of money given by the buyer to the seller at the time an offer is made on a property. This deposit serves as a sign of good faith to the seller that the buyer is serious about wanting to purchase the property. The amount of earnest money will vary, but is normally a few thousand dollars up to one percent of the sale price.
The Role of Earnest Money
When a homebuyer puts down earnest money, the funds become the seller’s money and there is no risk to the seller. However, if the buyer backs out of the purchase, the earnest money will not be returned to them and will instead go to the seller. This provides a greater assurance to the seller that the buyer is serious and will not unexpectedly walk away from the purchase agreement.
Earnest Money vs. Good Faith Deposit
Earnest money is often referred to as a good faith deposit. The terms are often used interchangeably, but there are a couple of key differences. A good faith deposit will be refundable to the buyer in certain circumstances. For example, if the seller does not accept the offer made by the buyer, the deposit will be refunded.
When It Is Put Down
Typically, buyers submit earnest money when making an offer on a house. Once both parties have agreed to the sale, the earnest money will move from being “pending” to being in “escrow.” This means that the deposit is held in a separate account and handled by a neutral third party.
Understanding Earnest Money Deposits
Earnest money deposits vary greatly depending on a variety of factors, including the buyer’s personal financial situation and the local market conditions. An earnest money deposit can range from a few hundred dollars up to a much higher amount depending on the sale price of the home.
Where Does Earnest Money Go?
Similar to other real estate deposits, earnest money is put into an escrow account. This account is managed by a neutral third party who ensures that all funds are properly disbursed and that both parties in the transaction receive what is due to them. The third-party escrow holder will release the funds once the transaction has closed.
What Happens if the Buyer Backs Out?
The conditional nature of an earnest money deposit means that it’s only truly binding when all paperwork is finalized and signed. If the buyer chooses to back out of the sale, the earnest money will not be refunded and will instead be awarded to the seller. It is important to note that due to the conditional nature of an earnest money deposit, if the seller is the one who backs out of the sale, the earnest money will be refunded to the buyer.
What Are Common Uses for Earnest Money?
Earnest money typically goes towards a buyer’s closing costs at the end of the sale, but there are other uses as well. Depending on the sale agreement between the buyer and seller, earnest money can also be used to purchase title insurance, home warranties and other items that may be required at closing.
When Is Earnest Money Returned?
In an ideal situation, earnest money will be refunded once the sale closes. This is the case when the buyer has fulfilled all of the conditions of the sale agreement and the seller is satisfied with the outcome. Usually, the amount refunded will be slightly less than the amount initially put down due to the origination fee and other associated costs.
Advantages of Putting Down Earnest Money
There are a few key benefits associated with putting down earnest money, most notably, it demonstrates to the seller that the buyer is serious about purchasing the property. It also serves to protect the seller from the buyer backing out of the agreement. In some cases, buyers may even be able to negotiate a better deal on the house if they put down a larger earnest money deposit.
Earnest money is a deposit made by the prospective buyer when an offer has been accepted on a property. Although the amount of the deposit will vary, the deposit is typically a few thousand dollars and serves to demonstrate that the buyer is serious about purchasing the property. In the end, earnest money is beneficial for both the buyer and the seller, as it ensures the deal is binding and prevents either party from unexpectedly changing their mind.
