Earnest Money

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Earnest money is a cash deposit to confirm a contract.

What is earnest money?

Earnest money is also known as “good faith money.” It is used as part of the home buying process.

Usually, after the sales contract or purchase agreement is signed, a serious or committed buyer will put down this deposit to get some extra time to proceed with the closing process. During this time, the seller should take the property off the market. If all goes well, this money ultimately goes towards the down payment and closing costs.

How much should you pay in earnest money?

A seller wants a serious buyer because the closing process takes time. The buyer and seller can negotiate the percentage of the earnest money deposit (EMD). Typically, this ranges from 1% to 2% of the property’s purchase price. Of course, if there is a high level of interest by other buyers, the EMD may also increase.

How do you pay your EMD (deposit)?

During the inspection, appraisal, and closing process, this money is paid by certified check, personal check or a wire transfer. The legal firm, title company, or even in some states, the real estate broker holds this money in escrow.

Can you get your deposit back? Why?

Two of the contingencies in your contract include the home inspection and home appraisal process.

If there is a problem with the home appraisal, such as the home was appraised for less than anticipated, you can ask for your money back. This contingency can give you room to negotiate with the seller for a better price or have them make some concessions, such as paying your closing costs.

If the home inspection reveals that the property has a significant flaw, such as mold or flooding, you can either negotiate a lower price, ask for repairs to be made, or ask for your earnest money back.

There are a few other situations where you can get your earnest money deposit back. Be sure to read your contract which outlines what additional circumstances qualify.

On the other hand, you may lose your earnest money deposit if you waived your contingencies, ignored the timeline and deadlines outlined in the contract, or simply bow out of purchasing the house.

In a highly competitive buying market, some buyers are willing to waive their contingencies entirely. However, this comes with serious risks. If there are any hiccups in financing or inspection, you will forfeit your earnest money deposit.

Be sure to read and abide by the terms and deadlines of your contract. If you miss the deadline that stipulates a specific date to complete the home inspection by, you also risk losing your deposit.

Finally, if you have a change of heart and choose not to buy the house, the seller loses out because he took the home off the market during this time. Additionally, you will lose out on your earnest money deposit as compensation for the seller’s wasted time and money required to re-list the house.