Oct
22
Real Estate Term: Earnest Money
Filed Under Selling Your Home | Leave a Comment
When a seller and buyer agree to a purchase agreement for a home sale, the buyer is requested to place some small amount of money into a trust account.
Such a front end deposit is referred to as "earnest money."
The actual amount of earnest money is something that the buyer and seller are able to negotiate and may differ from one contract to another. It could amount to 10%
of the purchase price or be as low as $500.
Earnest money amounts can be affected by several conditions:
Market conditions: Stronger markets often call for more earnest money
Buyer economics: First-time buyers often give less earnest money
Seller psychology: Skeptical sellers often ask for more earnest money
It really doesn’t matter how much or how little earnest money is provided. This fund transfer is a "good faith" action to confirm that the buyer wants to complete the home purchase.
If it should happen that, during the process, the buyer violates the terms of the purchase agreement or backs out of the deal, the earnest money can be kept by the seller. This does not ccur much because, when the purchase agreement s are written , there are "escapes" for the buyer, called "contingencies" written into the original agreement.
Some of the usual contingencies may be that the buyer must have financing by a certain date; he seller must give the buyer a clean title, and, prior to completion of the sale, the home needs o pass a home inspection.
If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.
When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer’s bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.
Earnest money customs vary from state to state, city to city, and even locale to locale. Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts. The earnest money you save may be your own.