Earnest money, also known as a good faith deposit, is a sum of money that a buyer puts down to demonstrate their seriousness about purchasing a home or property. It is typically around 1-3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on whats customary in the local market. The purpose of earnest money is to tell the seller that the buyer is serious about purchasing the property, and it protects the seller if the buyer backs out. If the seller accepts the offer, the earnest money is held in trust or escrow by a third party, such as a settlement or title company. When the transaction is settled, the deposit is applied to the buyers portion of the remaining costs. If the offer is rejected, the earnest money is usually returned, since no binding contract has been entered into.
The amount of earnest money a buyer offers varies based on the market and the condition of the property. If a buyer wants a home in a location prone to bidding wars and cash offers, they may have to offer a considerable amount. A lower earnest money deposit may be suitable for a fixer-upper in a slow market. If a buyer is working with a real estate agent, they should be able to provide direction on how much earnest money to offer.
Earnest money is usually paid by certified check, personal check, or a wire transfer into a trust or escrow account that is held by a real estate brokerage, legal firm, or title company. The funds are held in the account until closing, when they are applied toward the buyers down payment and closing costs. Alternatively, the buyer can receive their earnest money back after closing.
While the earnest money deposit helps give the seller something to show for lost time if the deal falls through, there are certain “contingency clauses” that a buyer can put into their offer that make the earnest money refundable under certain circumstances. For instance, if the seller backs out of the deal, the buyer will always get their earnest money back.
