What Is Earnest Money?
Simply put, earnest money is a “good faith deposit” that accompanies your offer on a property to indicate to the seller that you are sincere, or “earnest,” in your endeavor to buy their property. Upon contract ratification, and the deposit is held until settlement, at which time it is applied to your down payment or closing costs. In the event of any overage, it’s refunded to you at settlement. Typically, there is no set requirement and, that the amount of your earnest money deposit depends primarily on your marketplace and local custom.
Who can hold earnest money?
Typically the earnest money deposit should be made to a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company. As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close for whatever reason. Most buyers prefer to have real estate agents or attorneys hold the earnest money deposit as they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used. To avoid the loss of your deposit, follow these tips.
• Never give an earnest money deposit to the seller.
• Verify that the third party will deposit the funds into a separately maintained trust account.
• Obtain a receipt.
Is your earnest money deposit refundable upon cancellation?
Whether or not earnest money payments are refundable depends on the real estate contract itself. Your contract can have a stipulation that calls for all earnest money deposits to be returned if the terms of the contract are not fulfilled, for example if the buyer applies for financing but is denied. However, it is not uncommon for contracts to explicitly state that there will be no refund of earnest money under any condition, so it is of the upmost importance to read the contract thoroughly.
What happens to the earnest money before closing?
The purchase contract governs where earnest money will go. It should also specify the amount(s) to be paid, when the payments are to be made, whether the money will be held in a trust (escrow) account, who will hold it, whether it will be credited against the purchase price at closing, and what may happen to it if the transaction does not close.
Earnest money is an important part of the home buying process. If you are serious about purchasing a home, you need to indicate to the seller you are serious. They’ll be taking what is probably their single largest asset off the market if they accept your offer. A reasonable earnest money deposit helps reassure the seller you are serious about buying their home.
