Think of earnest money as a deposit or a show of good faith. It’s a sum of money that the buyer provides to the seller as a sign of their commitment to purchasing the property. Typically, the amount of earnest money is a small percentage of the overall purchase price, but it can vary depending on the local real estate market and the specific agreement between the buyer and seller.
So why is it called “earnest” money? Well, it’s because it demonstrates your earnestness or seriousness about buying the property. By putting down earnest money, you’re telling the seller that you’re not just casually looking around, but you’re genuinely interested in following through with the purchase.
Once the seller receives the earnest money, they usually deposit it into an escrow account, which is held by a neutral third party, such as the title company. This ensures that the funds are safe and won’t be misused by either party.
Now, here’s what happens to the earnest money in different scenarios:
- If the purchase goes through: The earnest money is applied towards the down payment or closing costs, reducing the amount the buyer needs to pay at closing.
- If the buyer backs out: The earnest money may be forfeited to the seller as compensation for taking the property off the market and potentially missing out on other potential buyers.
- If the seller backs out: In some cases, the seller may be required to return the earnest money to the buyer, especially if they breach the terms of the agreement.
It’s essential to note that the specific details regarding earnest money, including its amount, the timeline for its release, and the circumstances under which it can be refunded, are typically outlined in the purchase agreement or contract between the buyer and seller.
So, in a nutshell, earnest money is a way to show the seller that you’re serious about buying a property. It helps give the seller confidence in your commitment and is a part of the overall process of purchasing real estate.