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Real Estate Basics: What is earnest money?
With all of the moving parts surrounding, well – making a move, the financials can quickly become confusing. One of the often-overlooked portions of purchasing or selling a home is earnest money.
Earnest money is essentially a deposit on the home you would like to purchase. Because a seller removes her property from the market while the closing process is completed, earnest money is seen as a good faith deposit that a buyer intends to carry through with the purchase. If the closing isn't completed, the seller would keep the earnest money unless an issue arises that was outlined as a reason to return the money to the buyer in the purchase agreement.
Most often those pre-outlined issues that would return earnest money are issues with financing, appraisals or inspections, but technically, the terms for earnest money can be as different as the houses they go toward purchasing. Each party will outline in the contract the mutually agreed upon terms, and generally, if the transaction goes according to plan, the earnest money is put toward the buyer's down payment or closing costs.
In markets with low inventory, earnest money can be viewed by sellers as a way to gauge the seriousness of buyers, so the amount of earnest money a buyer offers can help differentiate himself in a multiple offer situation. Of course, it's money that may be forfeited, so that should be kept in mind when deciding how much earnest money to deposit.
Typically, that deposit is kept in an escrow fund by the buyer's or seller's real estate brokerage, title company or legal firm – never given directly to the sellers – to ensure the terms of the contract are met and the money is handled properly. The amount is generally between one and three percent of the purchase price, but it can also be a flat amount depending on the market and the condition of the property being purchased.
As with most things in real estate, earnest money and its terms are negotiable, which is why having a trusted REALTOR® helping you through the process can save you money and stress during the buying or selling process.
