Understanding Earnest Money:
Earnest money, also known as a good faith deposit, is a financial gesture made by a homebuyer to demonstrate their serious intent to purchase a property. It serves as a show of commitment and is typically presented when an offer is made on a home. The amount can vary but is generally a percentage of the property’s purchase price.
PLEASE NOTE: Earnest Money is non-refundable if a buyer backs out of the contract after the Due Diligence period or for no reason. (See “Understanding Due Diligence” in next Blog post).
Your Earnest Money check will be a credit on your closing documents.
The Significance for Buyers:
For homebuyers, earnest money is a powerful expression of sincerity in their intention to buy the property. By putting down earnest money, buyers signal to sellers that they are serious about the deal. This initial deposit can strengthen the buyer’s offer, making it more appealing in competitive markets. Should the deal proceed successfully, the earnest money is often applied towards the down payment or closing costs.
The Role for Sellers:
From the seller’s perspective, earnest money provides a level of assurance that the buyer is committed to the transaction. Accepting an offer with earnest money suggests that the buyer is financially capable and genuinely interested in closing the deal. In situations where the deal falls through due to the buyer’s fault, the seller may be entitled to keep the earnest money as compensation for the time the property was off the market.
Protecting Both Parties:
Earnest money is typically held in escrow, a neutral account managed by a third party. This ensures that neither the buyer nor the seller has immediate access to the funds until the terms of the contract are met. The escrow process adds a layer of protection for both parties, fostering trust and fairness throughout the transaction.
What Happens if the Deal Falls Through:
In the unfortunate event that a real estate deal falls through, the fate of the earnest money is determined by the terms of the purchase agreement. Common reasons for a deal to dissolve include issues discovered during inspections, financing challenges, or other contingencies outlined in the contract. In such cases, the escrow agent follows the agreed-upon procedures for the return or distribution of the earnest money.