Earnest money is a deposit a homebuyer makes to the seller to show good faith and serious intent to purchase a property. It acts as a security deposit that demonstrates the buyer's commitment and encourages the seller to take the home off the market while the transaction proceeds through inspections, appraisals, and financing
. Key points about earnest money when buying a house:
- Amount: Typically ranges from 1% to 10% of the home's purchase price, with 1% to 3% being common in many markets. The exact amount depends on local customs, market competitiveness, and seller preferences
- Timing: Usually paid when the purchase agreement or contract is signed, or sometimes with the offer
- Holding: The earnest money is held in an escrow account by a neutral third party (escrow company, title company, or real estate agency) until closing
- Use at Closing: If the sale completes, the earnest money is applied toward the buyer's down payment or closing costs
- Refunds and Forfeiture: The buyer can get the earnest money back if the deal falls through due to contingencies specified in the contract, such as a failed home inspection, appraisal issues, or financing problems. However, if the buyer backs out without a valid reason outlined in the contract, they risk losing the earnest money to the seller as compensation for taking the home off the market
In essence, earnest money protects the seller from losing time and potential buyers while giving the buyer time to complete due diligence and secure financing, making it a critical part of most real estate transactions.
