Earnest money is a good faith deposit buyers pay to an escrow account to demonstrate their seriousness about purchasing real estate. It is often used to encourage the seller to continue with the transaction while the homebuyer secures financing. Understanding how much of a deposit is expected, where the money goes, and how to get it back if the deal falls through is key for people who are considering purchasing a home.
How Earnest Money Works
As soon as a homebuyer and seller have reached an agreement on a home’s purchase price and the terms of the sale, they enter into a purchase agreement. The buyer will need to deposit earnest money to an escrow account that is typically held by the Realtor or the title company. The money helps to ensure that the buyer follows through with his or her intention to purchase the home. If the buyer backs out, the money is given to the seller. If the seller doesn’t follow through with the agreement, the money is returned to the buyer. The earnest money will go toward the home’s down payment if the deal is successfully closed.
How Much Earnest Money Is Needed?
The amount of earnest money required can vary significantly depending on the terms of the contract, the local market, and the wishes of the seller. Buyers can typically expect to pay about 1-5% of the overall price of the home. In some cases, earnest money may appear as a fixed amount such as $6,000.
If the market is hot, the amount of earnest money required will often increase along with the increased cost of the home. Earnest money deposits of more than $100,000 are not unheard of in extremely competitive markets where home prices are high.
Retaining Earnest Money
The key to keeping earnest money following a deal is to properly prepare. This entails understanding deadlines and implementing contingencies.
The buyers inability to secure financing, a home inspection failure, issues with the title, failing to meet deadlines, and the home not appraising for enough are common reasons a sale falls through. If the deal doesn’t close because of the buyer, the seller typically keeps the deposit. If the seller terminates the deal, earnest money is always returned to the buyer.