Earnest money is a deposit made to a seller, as a buyer’s affirmation in good faith to buy a home. This is done for the buyer to get extra time to get financing and conduct the title search, property appraisal and inspections before closing. Usually, earnest money is handed down when the sales contract or purchase agreement is signed, but sometimes it is also attached to the offer. Once deposit is done, the funds are held in a security account until the closing, after which the deposit goes to the buyer’s down payment and closing costs. The sellers usually demand 1% – 5% of the price of the house.
Earnest money is commonly known as an ‘Escrow deposit’ or ‘Good faith money’.
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A contract is signed, when a buyer decides to purchase a home from a seller. As per the contract, the buyer is under no obligation to purchase the home, as he would wait for the inspection and appraisal of the said property first. In the meantime, the contracts also ensure that the seller takes the house off the market while it’s inspected and appraised. Here, the buyer’s offer to purchase the property is made in good faith, for which he makes an earnest money deposit (EMD).
The buyer may recover the earnest money if everything aforementioned under the contract doesn’t fall in place. For e.g. if the house for the sale, fails the inspection and appraisal and reveals a serious defect. You have to make sure that these contingencies are listed in the contract. The contingencies arising could be –
Of course, earnest money isn’t always refundable. For e.g.
Earnest money is always returned to the buyer if the seller break off the deal.
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While the buyer and seller can negotiate the earnest money deposit, it often ranges between 1% – 5% of the price of the house, depending on the market scenario.
Apart from the local market rates, the size of the earnest money deposit also depends on the level of interest other buyers show for the property, how much in demand the housing market is and also how quickly a prospective buyer can close on their offering price.
While the earnest money deposit is often a percentage of the sales price, some sellers prefer a fixed amount. So, higher the earnest money, the more serious the seller interests. Hence, the buyer should offer a higher earnest deposit to be accepted, without putting any extra money at risk, as there still might be a chance for the deal to not fall through or the deposit forfeited.
Earnest money is usually paid and held in an escrow account that is handled by a real estate brokerage, legal firm or title company. The funds are held in the account like a bank account until the closing, where they are applied with the buyer’s down payment and closing costs, hence they earn interest as well.
As a buyer, you can do several things to protect your earnest money deposits.