What is Earnest Money?

What is Earnest Money?

When you’re interested in buying a home and ready to make an offer, something called earnest money is normally required. Earnest money is a good faith deposit submitted by the buyer to demonstrate they are serious and committed.

If the seller rejects your offer the earnest money is returned. If your offer is accepted the earnest money becomes part of your down payment. In most states the earnest money check is made payable either to the real estate brokers trust account or to an escrow agent. The money is usually held in the account until the transaction closes, but state laws may vary.

The earnest money you need to deposit depends on a few factors; including the current real estate market, and what amount the seller may require. The earnest money deposit is a negotiable amount between the buyer and seller, but on average you can expect to deposit between 1-3% of the purchase price.

While most purchase contracts include contingencies that allow buyers to back out of the deal under certain conditions. Don’t make the mistake of agreeing to remove contingencies that give you an option to back out if needed. For instance, if buyers agree to remove a loan contingency and their loan falls through, they’ll lose their earnest money.

You should also include a time frame in which you have to cancel the purchase contract and get to keep your earnest money known as an option period.

Other contingencies—such as a home that’s uninsurable, inspection issues, a problematic title search, or if a house doesn’t appraise—also protect a buyer by allowing the penalty-free canceling of a contract.

As your realtor I’m here to explain what situations would allow you to back out of your offer to purchase without losing your earnest money. Working with an experienced real estate agent who can help guide you throughout the buying process, including how much earnest money is enough is a valuable resource every buyer should have!

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