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Understanding Earnest Money

earnest-moneyYou are not financially obligated to a home until you go to closing right?? Nope! That’s wrong! There is a financial commitment that is required for buyers to make when entering into a ratified sales contract. That financial commitment is known as an earnest money deposit. An earnest money deposit is the first financial investment you will make into buying a home.

Definition

Earnest money is a deposit made by the buyers on a sales contract at the time of ratification. Typically the deposit is given to the buyer’s agent or the settlement agent. The money is used to show the seller that the buyers are serious about the contract. It protects the seller from having a buyer that is offering on multiple home without having serious interest in their property.

Amount

The amount of the earnest money deposit can fluctuate depending on the market. In a slower market some sellers may accept as little as $500-$1000. In a more competitive market a seller may require a larger earnest money deposit such as 2-3% of the sales price.

Terms

Earnest money is returned to the buyers at the time of closing. At settlement the earnest money is applied toward the down payment and closing costs.  If the earnest money exceeds the total amount of downpayment and closing costs owed by the buyer, the buyer will receive the remaining amount back at closing.

Should the sales contract fall through the earnest money may be returned to the buyer depending on the terms of the contract becoming void. If the sale isn’t finalized due to the buyer’s negligibility such as deciding to purchase another home or not being able to secure financing the earnest money is split between the seller and settlement agency. If the contract becomes void due to the sellers not meeting the terms of the contract, the money is returned to the buyer.


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Estimated Monthly Payment
$2,385