Earnest Money What Is It And Is It Necessary

Earnest Money What Is It And Is It Necessary

In today’s housing market, making sure your offer on a home will stand out is important. There are a few ways to let a seller know you’re serious about buying a home, such as a preapproval from a lender. Another option, though not required, is putting down an earnest money deposit.

 What Is Earnest Money In Real Estate?

Earnest money is when you put down money before closing on a house to show you're serious about purchasing.

It's also known as a good faith deposit.

When a buyer and seller enter into a purchase agreement, the seller takes the home off the market while the transaction moves through the entire process to closing. If the deal falls through, the seller has to relist the home and start all over again, which could result in a big financial hit.

Earnest money protects the seller if the buyer backs out. It's typically around 1 – 3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on what's customary in your market. If all goes smoothly, the earnest money is applied to the buyer's down payment or closing costs.

If the deal falls through due to a failed home inspection or any other contingencies listed in the contract, the buyer gets their earnest money back. The practice of depositing earnest money can decrease the likelihood of a buyer placing offers for multiple homes, then walking away after the seller takes the home off the market.

 Why Should You Pay Earnest Money?

Earnest money isn't always a requirement, but it could be a necessity if you're shopping in a competitive real estate market. Sellers tend to favor these good faith deposits because they want to ensure that the sale won't fall through. Earnest money can act as added insurance for both parties in the transaction.

Earnest money could also lower the amount you need at closing because it's applied directly to your down payment or closing costs. Essentially, you're just putting up some of the money earlier in the process.

How Much Earnest Money Is Enough?

 The amount of earnest money you should offer depends on the particular real estate market your desired property is in. A languishing real estate listing in a slow market may not need as much earnest money as in a hot market with multiple buyers who are vying for the same property. If you plan to purchase in a neighborhood where cash offers and bidding wars are common, a higher good faith deposit is a good idea.

If you're working with a real estate agent, they should be able to provide direction on how much earnest money you should offer. If you're competing with others for the same property, it's in your best interest not to undercut the earnest money deposit amount because you could lose the home to a stronger offer. If it's a slow or moderate market, your agent can advise you if a good faith deposit in the standard range will suffice.

 Is Earnest Money Refundable?

Earnest money has contingencies that protect both the seller and buyer in certain situations.

When you make an offer on a home and the seller accepts, the sale is only finalized when contingencies, or certain criteria, are met. They're typically listed in the purchase agreement and cover the inspection, appraisal and mortgage approval, among other items.

 The Bottom Line

Earnest money can protect a home buyer if something is wrong with a property, and also the seller if you simply want out of the deal. Going the extra mile with a Verified Approval or an earnest money deposit can also prove to a seller that you're serious about your offer, making your offer stand out from other buyers.

Stacey Hawkins Headshot
Phone: 954-999-8282
Dated: May 19th 2022
Views: 156
About Stacey: ...

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