4 Things You Need to Know About Earnest Money

During your home buying process, after you make an offer, you will be asked for the “earnest money.” Some of you may be confused by the term and not even know what it is. We are going to discuss some things you need to know about earnest money as you proceed with your home purchase.

During your home buying process, after you make an offer, you will be asked for the “earnest money.” Some of you may be confused by the term and not even know what it is. We are going to discuss some things you need to know about earnest money as you proceed with your home purchase.

What is earnest money?

Earnest money can be looked at as a security deposit. After an offer is accepted by a seller, they will take the home off the market and ask you for money as insurance that the home sale will proceed. It minimizes their risk by preventing a sale from falling through. It is extra assurance that they will not miss future opportunities for a profitable sale in having the home off the market while under contract.

In most cases, the earnest money is not distributed to the seller, rather it is held by a mutual third party called the escrow company. The money is deposited into a savings account while the escrow company ensures that the contract is followed. If it is not followed, they will handle the dispute and the disbursement of the earnest money in the escrow account.

How much earnest money is required?

It is recommended that the amount of earnest money deposited be between 1 and 3 percent of the offer amount which is due within 2 days of the accepted offer. One percent is on the lower end of the spectrum and is mostly utilized when the home is not in a competitive offer situation or the buyer is low on cash. For competitive offer situations, 3 percent or higher could be expected to ensure your offer is taking seriously.

It is not an additional cost

Remember, earnest money is not an extra cost. It is a deposit on the home, and it will be credited to the closing cost or the down payment. For example, if your earnest money is $10,000 but your down payment and closing costs are $30,000, you would only need to bring in another $20,000 to close.

It is safe, in most cases

If you listen to your real estate agent and pay close attention to their advice, your earnest money will be protected. If your agent’s guidance is good, you should have nothing to worry about. You will have things such as inspection contingencies, appraisal contingencies, and various other protections built into the contract to ensure your money is safe.