Earnest money is a sum that’s offered to show a party selling a house that a buyer is serious about proceeding with a purchase. It indicates that a buyer is genuinely interested and has the financial means to close the deal. An earnest money deposit can help one buyer stand out when compared to others and can help a buyer persuade a seller to make concessions in negotiations.
How Much Earnest Money Should a Buyer Offer?
The amount a buyer should offer as earnest money depends on the area and the price of the house. In a competitive market, a fairly large earnest money deposit is necessary to have a seller take an offer seriously. A real estate agent can offer a client specific guidance in that area.
How Is Earnest Money Handled?
Earnest money is paid when a buyer makes an offer. The funds are generally managed by a third-party escrow agent. This is done because the money can be refunded without a hassle if the buyer decides not to proceed with the transaction for a reason permitted by the contract. If the buyer gave the money directly to the seller and had a valid reason for withdrawing from the contract, the seller might refuse to refund the money and the parties might wind up in court. If the transaction proceeds and the sale is finalized, the money is applied to closing costs or the down payment.
When Can a Buyer Have Earnest Money Refunded?
Real estate contracts generally include contingencies that allow buyers to walk away and receive a refund of earnest money in specific circumstances. If the buyer withdraws from the deal for a reason not allowed in the contract or simply changes his or her mind, the buyer forfeits the earnest money and the seller gets to keep it.
Contracts typically let a buyer walk away if a home inspection uncovers serious problems. Another common contingency allows a buyer to receive a refund of earnest money if the appraised value of a house is less than the amount of the buyer’s offer. A buyer can also request a contingency allowing him or her to walk away if it’s not possible to obtain a mortgage in time for closing.
Some buyers want to make the purchase of a new house contingent on the sale of their old home. Many sellers are unwilling to accept this contingency, however, because of the unpredictability of the residential real estate market.
Understand How Earnest Money Works
Making an earnest money deposit demonstrates to a seller that a buyer is serious and acting in good faith. Both parties should thoroughly discuss contingencies with their real estate agents and understand under what circumstances the seller can keep the earnest money and when it should be returned to the buyer.