Earnest Money, also known as Good faith money, is essentially a deposit a buyer makes on a home they want to purchase. In most cases, the earnest money is delivered when the sales contract or purchase agreement is signed, but it can also be attached to the offer. Once deposited, the funds are typically held in an escrow account until closing. At that time, the deposit will be applied to the buyer's down payment and closing costs.
While the buyer and seller can negotiate the earnest money deposit, it often ranges between 1% and 2% of the home's purchase price, depending on the market. In hot housing markets, the earnest money deposit might range between 5% and 10% of a property's sale price.
Of course, the higher the earnest money amount, the more serious the seller is likely to consider the buyer. Therefore, a buyer should offer a high enough earnest deposit to be accepted, but not one so high as to put extra money at risk.
The deposit should be payable to a reputable third party, never give the deposit directly to the seller. Earnest money is customarily paid by certified check, personal check, or a wire transfer into a trust or escrow account held by a real estate brokerage, legal firm, or title company. Buyers should verify the funds will be held in an escrow account and always obtain a receipt. The funds are held in the account until closing when they are applied toward the buyer's down payment and closing costs.
It's important to note that escrow accounts, like any other bank account, can earn interest. If the earnest funds in the escrow account earn interest of more than $5,000, the buyer must fill out tax form W-9 with the IRS to receive the interest.
When a buyer decides to purchase a home from a seller, both parties enter into a contract. The contract doesn't obligate the buyer to purchase the home but shows the intent to buy the house. The contract should include contingencies that include finance approval, home inspection, home appraisal, and any other locally accepted inspections. Without these, the deposit could be forfeited if the buyer can't get financing, or a serious defect is discovered during the inspection.
When the seller accepts a contract, they agree to take the house off the market while it's inspected and appraised. They may allow showings of the property and even receive a "back up" offer should the first offer fall through.
The buyer should read, understand, and abide by the terms of the contract. For example, if the agreement states a specific date that the home inspection must be complete, the buyer must meet that deadline or risk losing the deposit—and the house.
The buyer might be able to reclaim the earnest money deposit if something specified ahead of time in the contract goes wrong. For instance, the earnest money would be returned if the house doesn't appraise for the sales price, or the inspection reveals a serious defect—provided these contingencies are in the contract.
However, the earnest money isn't always refundable. For example, the seller would keep the earnest money if the buyer decides not to go through with the home purchase for contingencies not listed in the contract. Or if the buyer fails to meet the timeline outlined in the agreement. The buyer will forfeit the earnest money deposit if they have a change of heart and decide not to buy.
Earnest money is always returned to the buyer if the seller terminates the deal for any reason.
Thinking about buying a new home? Start your research by visiting http://bit.ly/midrhome to see what is on the market in the area you would like to live! If you have general real estate questions, I’m happy to chat. You can reach me via phone, text, email, or social media.
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