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What Is Earnest Money?

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A home buyer’s good faith get portrayed when he/she deposits some money to the seller as earnest money. The buyer then enjoys the extra time to appraise the property, conduct a title search, do inspections, and get financing before closing. A title company or the seller’s broker hold this money and get used as closing costs and down payment credit. Unfortunately, many home buyers wonder; what is earnest money? Luckily, this article will give insight into everything a home buyer should know about earnest money.

Though earnest money gets delivered when the purchase agreement or sales contract gets signed, sometimes it comes with the offer. Then the deposited money gets kept in an escrow account until when finishing the deal. Many home buyers may confuse earnest money as a down payment. But it’s not the case; it is a good-faith gesture to the seller indicating the seriousness of the buyer to buy the home. Also, home buyers may struggle with the reasons behind paying earnest money. They include the following:

Why Home Buyers Should Pay Earnest Money

The seller and the home buyer agrees after reaching a mutual understanding. They then sign a contract that does not obligate the buyer to buy the home as the inspection and home appraisal may afterward indicate problems. The agreement also obliges the seller to remove the house from the market while being appraised and inspected. Then the buyer deposits some chunks of money to prove his/her offer to buy the home in good faith. If the home buyer does not get the earnest money concept right, he/she is bound to lose a lot of money. Here are instances where the buyer can get his/her earnest money back:

Instances Where a Home Buyer Gets Refunded the Earnest Money

If anything specified forefront in the contract gets violated, the buyer has a right to reclaim his/her earnest money. For example, if the inspection reveals severe defects or problems. Also, if the home valuation indicates less than the stated sales price. But first, such contingencies must have gotten stipulated in the contract. Sometimes the seller terminates the contract. In this regard, he/she should return the home buyer’s earnest money. Generally, the earnest money is never refundable if the buyer’s timeline as indicated in the contract expires before meeting his/her obligations. The following are other instances where a home buyer can lose his/her earnest money.

Instances Where the Earnest Money Get Lost

Despite grasping what is earnest money and what it entails, a home buyer should also get aware that the amount is also negotiable. Based on an agreement between the buyer and the seller, earnest money deposit can range from 1% to 10% of the actual home price. The real estate industry comprises of a very competitive market. A buyer should offer an impressive earnest money deposit to impress the seller. If the seller receives a better offer, he/she will opt for the higher bidder. Depending on the available competitive offers, 4% to 5% of the total value gets recommended.

According to Jeremy Colonna, a director of Matchpoint Funding, home buyers make huge mistakes when they agree to remove contingencies listed in the contract. Many of them become handy and stands for them legitimately in case of a problem. As a result, many get to lose their earnest money deposit.

How Home Buyers Should Protect Their Earnest Money Deposit

  • Including all financials and inspections contingencies in the contract.
  • Reading and understanding the contract’s terms and abiding by them.
  • The earnest money deposit should get handled appropriately. Deposit should get paid to reputable third parties like escrow companies, renowned real estate brokerage, legal firms, or title companies.