What Is Earnest Money?

What Is Earnest Money? A deposit given by a buyer to a home seller as proof that the buyer is committed to buying the property is known as earnest money.

Definition and Examples of Earnest Money

When you submit an offer to purchase a house, you must pay earnest money as a deposit. By doing this, you’re letting the seller know that you’re committed to buying their house. Additionally, the earnest money is a component of practically every real estate transaction in the United States, despite the fact that it isn’t always required as part of a home offer.

Definition and Examples of Earnest Money
Definition and Examples of Earnest Money

The seller will determine how much they require; they might decide on a set percentage of the list price or just a flat sum. Deposits between 1% and 2% of the total cost are typical. According to how the sale goes through—or doesn’t—earnest money will be distributed to the buyer, the seller, or back to you.

  • Earnest money shows the seller a buyer’s intention to purchase their home.
  • Earnest money is also called a good-faith deposit.

How Earnest Money Works

An offer to buy a home typically includes earnest money. Regardless of whatever conditions you include in your offer, this money is intended to demonstrate to the seller that you are sincerely interested in purchasing their home. And unless you’re putting in an all-cash offer to buy the house as-is, your offer probably includes contingencies.

The sale of your own home, obtaining financing, and passing a thorough home inspection are examples of common contingencies. It will be given to either you or the home seller, depending on how your contract is handled. That money can be forfeited to the vendor if you don’t keep half of the contract. Let’s examine a case in point.

Let’s imagine the seller accepts your offer after you made a conditional offer on a house that was subject to a positive home inspection. When another house suddenly appears on the market, you have your finance in place, the home inspection passes off without a hitch, and you are almost ready to close. You can’t bear to let your chance to own your ideal home pass you by.

How Earnest Money Works
How Earnest Money Works

The earnest money will be given to the seller if you decide to cancel the deal for a cause not covered by your contingency, such as the house inspection failing, etc. In this instance, a nicer home is not a valid justification for breaking the contract, in which case your good-faith deposit will be lost.

But what if this is your dream home and something goes wrong?

Let’s say the foundation of the house has cracks, according to the home inspection report. You have a few choices as long as the inspection deadline specified in the contract hasn’t already gone. You can decide to back out of buying the house, or you can try to get the seller to fix the foundation or give you credit for the cost of the repair. You are rescinding the purchase agreement voluntarily, and your earnest money will be returned to you because the contingency includes a positive house inspection.

If everything goes as planned and you decide to terminate the agreement due to a covered contingency, the seller will sign the document releasing the earnest money deposit. in order for you to get your money. There may, however, occasionally be conflicts, and the seller may decline to sign the necessary documents. The issue in this situation will need to be resolved in court.

However, It is often dispersed in your direction if the house inspection goes well, you are approved for financing, and the property purchase proceeds. You can decide whether the money should be returned to you or applied to the cost of buying the house.

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