Everything You Need to Know About Earnest Money
Posted on March 26, 2021
If you’ve ever purchased a home before, you may have heard a few mortgage or real estate terms and had no idea what they meant. While some of these real estate terms are not important to memorize, there are a few that you should be able to ace in a vocabulary test before you move forward with your transaction. One of those important words is Earnest Money.
What is Earnest Money?
Earnest money is a deposit you put down as a “good-faith” gesture to show that you’re serious about buying a house. Once you can show that you are earnest about buying this house, the seller is more likely to trust you and move forward with the transaction.
If you decided to pay an earnest money deposit, the seller will accept or decline your offer. If they accepted your offer, a contract will be made and the house will be taken off the market to move forward with the transaction. Your earnest money locks you into the deal but if contingencies are not followed by the buyer or seller, your deposit may not be returned or you will get to take it back (depending on the situation). While you wait to close on the home, your earnest money is deposited into an escrow account where it is held until closing day. Once you reach closing day, the money is subtracted from the amount owed and put towards your closing costs for the house.
How much is earnest money?
You can plan to pay 1-5% of the home purchase price for your earnest money deposit. The exact price depends on the market and area you are in. In some markets, you’ll need a fixed amount of $1,000 or $2,000 and other communities may focus on a percentage of the purchase price. Since it is your money, it’s a good idea that you talk to your real estate agent about how much earnest money they suggest you should pay.
If you have more questions about earnest money and how it works, it’s always a good idea to ask your real estate agent or lender. Both can be your best resource during the home buying process and should be willing to answer any and all questions you may have.