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What Is Earnest Money?

4 min read

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Earnest money is a deposit provided to a seller to show that the buyer is serious about purchasing a residence. The funds allow the buyer more time to secure financing and complete title searches, appraisals, and inspections before to closing. Earnest money is similar to a down payment on a house, an escrow deposit, or good faith money in many aspects.

Understanding Earnest Money

Earnest money is usually presented with the sales contract or purchase agreement, although it can also be linked to the offer. The funds are usually held in an escrow account until the transaction closes, at which point they are applied to the buyer’s down payment and closing costs.

Both parties engage into a contract when a buyer decides to acquire a home from a seller. Because reports from the home appraisal and inspection may subsequently disclose faults with the residence, the contract does not commit the buyer to purchase the home. However, the contract requires the seller to remove the house from the market while it is examined and evaluated. The buyer makes an earnest money deposit (EMD) to demonstrate that his or her offer to acquire the property is genuine.

If something indicated in advance in the contract goes wrong, the buyer may be able to reclaim the earnest money deposit. If the house doesn’t appraise for the sales price or the inspection reveals a significant flaw, for example, the earnest money will be returned—as long as these contingencies are included in the contract.

Earnest money, on the other hand, isn’t usually refundable. For example, if the buyer decides not to proceed with the property purchase due to contingencies not stated in the contract or if the buyer fails to satisfy the contract’s timetable, the seller keeps the earnest money. If a buyer has a change of heart and decides not to buy, the earnest money deposit is forfeited.

While the earnest money deposit can be negotiated between the buyer and seller, it often varies from 1% to 2% of the home’s purchase price, depending on the market. In hot housing markets, the earnest money deposit could be anywhere from 5% to 10% of the property’s sale price.

While earnest money deposits are often a percentage of the purchase price, some sellers prefer a predetermined amount, such as $5,000 or $10,000. Naturally, the greater the earnest money deposit, the more seriously the seller will consider the buyer. As a result, a buyer should offer a big enough earnest deposit to be approved, but not so high that he or she risks losing more money.

Earnest money is frequently put into a trust or escrow account held by a real estate brokerage, legal firm, or title company through a certified check, personal check, or wire transfer. The funds are held in the account until the buyer’s down payment and closing fees are met, at which point they are applied to the buyer’s down payment and closing costs. It’s crucial to remember that, like any other bank account, escrow accounts can generate interest. If the earnest money in the escrow account earns more than $600 in interest, the buyer must file IRS Form W-9 to receive the interest.

What Is Earnest Money Used for?

Earnest money is a deposit used to purchase a residence in real estate. It usually varies from 1 to 10% of the home’s sale price. While earnest money does not bind a buyer to buy a home, it does force the seller to remove the property from the market while the appraisal is being completed. Earnest money is put down as a deposit to show that you are serious about buying the house.

Does Earnest Money Get Returned?

If something goes wrong during the appraisal that was predetermined in the contract, the earnest money is returned. This could be due to a lower appraisal price than the sale price, or if the house has a severe fault. Importantly, earnest money may not be refunded if the fault was not anticipated in the contract or if the buyer decides not to buy the residence within the agreed-upon time frame.

How Can Earnest Money Be Protected?

Prospective buyers might take a number of precautions to preserve their earnest money deposit. First, buyers can make sure that problems, financing, and inspections are all covered by contingencies. This prevents the deposit from being lost if a significant flaw is discovered or if financing is not secured. Second, thoroughly read and adhere to the contract’s terms. In some situations, the contract will specify a deadline for the inspection to be completed. To avoid forfeiture, the buyer should follow these terms to the letter. Finally, make sure the deposit is properly managed, which entails working with a trustworthy broker, title business, escrow company, or law firm.

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