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What it is: It's an upfront payment made by a buyer to show their serious intent to purchase a home. Also known as a "good faith deposit".
Role in Purchase Agreement: When a buyer and seller enter an agreement, the seller takes the home off the market. Earnest money ensures the buyer is committed to the purchase and gives the seller confidence to stop accepting new offers.
Difference from Down Payment: Earnest money is not the same as a down payment. It is usually held in a neutral third-party account until the purchase agreement is completed or terminated.
Not a Requirement but a Common Practice: There's no law stating that home offers must include earnest money. However, it's common practice and often necessary, particularly in a competitive market. Sellers tend to favor offers with an earnest money commitment.
Competitive Edge in Seller's Market: In a seller’s market where you're up against multiple offers, including earnest money in your offer might give you an advantage.
Deciding the Amount: The earnest money deposit is usually one to three percent of the home's sale price, but it can vary based on factors like the market condition, local policies, and seller’s requirements. Offering more can make your bid stand out, especially in a competitive market. A knowledgeable real estate agent can guide you on how much earnest money to offer based on the market conditions and competition.
Where the Money Goes: The earnest money stays in escrow until closing. If all goes well, it's applied to your down payment or closing costs. For some loans like VA and USDA that don't require a down payment, it's applied to closing costs.
Refundable or Nonrefundable?: Whether you get your earnest money back if the deal falls through depends on your purchase agreement. It spells out when the deposit is refundable and nonrefundable, and how refunds are handled.
Contingencies: Including contingencies in your offer can ensure you get your earnest money back if certain conditions aren't met, like a failed home inspection or financing issues.
Loss of Earnest Money: If you break the contract without cause or change your mind about the purchase, the seller could keep your earnest money. You might also lose it if you cancel the deal after contingency expiration dates.
Protect Your Deposit: To safeguard your earnest money, use an escrow account, understand your contingencies, and stay on top of deadlines. Consult with your real estate agent before signing the purchase contract.
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