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Real Estate News

What to Know About Earnest Money

Written By: Ashley Sutphin
Wednesday, May 11, 2022

Earnest money is just one of the many terms to know when it comes to buying a home. Its something you might initially overlook, but not understanding earnest money can create roadblocks in your process to buy a home once youre ready to make an offer.

The Basics of Earnest Money

In simple terms, the earnest money is a deposit that you put down to show that youre serious about buying a house. You want to show the seller that you really do want the home, and earnest money might be anywhere from 1 to 5 of the total purchase price.

It helps sweeten your offer to a seller and shows them that you want to take the necessary next steps to buy their home.

Then, in exchange for the earnest money, the seller will take their home off the market. Theyll start to work to arrange things like inspections.

Earnest money goes into an escrow account while you wait on your closing. The escrow account is with either the sellers broker or title company, or an escrow company.

Theyre essentially secu>

How Much Earnest Money Should You Offer?

Again, earnest money is typically anywhere between 1 and 5 of the price you agree on with the seller to buy the house. Theres a lot of variance in this, though. For example, in some locations, you might do a fixed amount and in others you could pay a percentage.

In very popular housing markets, you can see very high earnest money deposits. Your real estate agent will help you know whats in line with your area.

Earnest Money Is Not a Down Payment

This can be an area of confusion for some buyersearnest money is not a down payment. Your down payment is fully separate from earnest money and is anywhere from 10-20 of your homes purchase price.

You need to make sure that when youre thinking about how much a house will be, youre adding up your earnest money and your down payment. Your earnest money is due when you make an offer, while your down payment and closing costs are due later.

Is It Refundable?

When you enter into a purchase agreement, it will outline contingencies. These are situations that are agreed upon where you can walk away from a deal and still get your earnest money back.

For example, you might have an appraisal contingency in case the appraisal is lower than the sale price.

Your real estate agent will help you decide the contingencies to put in your contract.

If youre in a highly competitive market, you might agree to nonrefundable earnest money. Thats very risky because if your sale falls through, the seller gets to keep your money.

If you break the terms of whatever your purchase agreement is or you decide you dont want to buy a house anymore, then the seller can keep your earnest money.

This is why its important to work with a qualified real estate agent. Theyll help you understand what you need to know before you sign anything because otherwise, you could end up giving up a lot of money that you potentially cant afford.

As a final note, earnest money isnt required. If youre buying in a market thats not very competitive, you may not need to worry about it. Its instead a good way to beef up an offer, especially if youre worried there could be multiple offers on the house you want.

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