What is Earnest Money…

Earnest Money/Home Deposits Explained

What is earnest money? How much is earnest money? How does earnest money work? What’s the difference between earnest money and down payment funds? These are all common questions that home buyers ask real estate agents daily. By the time you’re done reading, you’ll have a solid understanding of the answers to these questions.

There are plenty of terms and concepts in real estate transactions that can prove confusing or complicated, especially when you have never encountered them before.

Earnest money proves to be more complicated than confusing for most people, since the term does a good job of describing what it is – money the buyer gives to show they are earnest, or sincere, in their intention to purchase a home.

Although the term is easy enough to understand, the practice can become somewhat complicated, particularly if the deal falls through.

Both buyers and sellers need to understand the ins and outs of earnest money. Three other terms that may be used in place of earnest money are a home deposit, an escrow deposit, or good faith monies.

Earnest money or house deposits are a crucial element of any home sale. Buyers should never confuse the difference between earnest money and a down payment.

Understanding Earnest Money…

Earnest Money – What is It?

When a buyer makes an offer on a home, the buyer and seller will enter into an agreement that pulls the property off of the market so that the next stages of the sales process can happen – like the home inspection and home appraisal. But the agreement is not one that requires the buyer to purchase the home, at least not yet.

That wouldn’t work, since guaranteeing you will buy a property before it is inspected or appraised is a recipe for disaster. The seller needs some motivation to take the home off the market, though, because they lose out on any other offers that might come through. After all, even if the inspection and appraisal go well, the buyers mortgage could fall through.

With earnest money, the buyer is showing the seller that they are serious about buying the home. The earnest payments are protection for the seller so that a buyer cannot just walk from a sale on a whim. The last thing a seller wants is to feel uneasy that a buyer could be out shopping for something better to come along.

By having earnest money, the seller would be compensated in the event the buyer decided not to purchase without a legitimate reason outlined in the real estate contract. Another way to think of these escrow funds is insurance in the event a Buyer defaults.

Just how serious the proof shown by the earnest money needs to be, depends on the market. Earnest money amounts tend to go up in markets where homes are selling like hotcakes.

It is also essential to note that in many locations, the seller is limited to collecting the earnest money as liquidated damages. In other words, they can’t sue the buyer for more money for their lack of performance.

How does the earnest money process work?

Usually, the earnest money or home deposit is handed over when the buyer and seller sign the purchase agreement or sales contract. However, there are certain situations where the money might actually be handed over when the offer is made. It all depends on the market conditions and the customs in the particular area you are buying.

When a buyer wants to purchase a home, they make an offer in the form of a home purchase contract. The contract is designed in a way that, as conditions are met, the buyer increases their commitment to the sale. The commitment begins with the earnest money deposit. These funds are known as “consideration,” which is an integral part of a real estate contract.

In the beginning, the earnest money is fairly easy to get back for the buyer. But as the sale process moves along, the money becomes more difficult to get back – eventually, it gets to a point where if the sale doesn’t go through, the seller gets to keep the earnest money.

The time in which a seller would be able to keep the house deposit is when all of the buyer’s contingencies have lapsed. Typically, one of the last contingencies to clear on the buyer’s part would be getting their mortgage. If a buyer has a firm mortgage commitment and there are no other contingencies left, a buyer could lose the money.