Earnest Money Deposit: What You Need to Know

Earnest money deposit

Earnest Money Deposit: What You Need to Know

When you’re buying a home, you’ll likely be asked to put down an earnest money deposit. This is a sum of money that shows the seller you’re serious about buying the property. It also helps to protect the seller in case you back out of the deal.

What is earnest money?

Earnest money is a good faith deposit that a buyer makes to a seller when they make an offer on a home. The amount of earnest money is typically between 1% and 3% of the purchase price, but it can be more or less depending on the market.

Why is earnest money important?

Earnest money serves two main purposes. First, it shows the seller that you’re serious about buying the property. When you put down earnest money, you’re essentially saying that you’re willing to lose that money if you back out of the deal without a valid reason. This gives the seller some peace of mind knowing that they’re not going to waste their time and effort marketing the property to other buyers if you change your mind.

Second, earnest money helps to protect the seller in case you back out of the deal for a reason that’s not considered a valid contingency. For example, if you back out of the deal because you can’t get financing, the seller is entitled to keep your earnest money. However, if you back out of the deal because the home inspection reveals major problems, you’ll likely be able to get your earnest money back.

How is earnest money handled?

Earnest money is typically held in an escrow account until the closing of the sale. This means that the money is held by a third party, such as a title company, and it’s not accessible to either the buyer or the seller until the deal is finalized.

What happens to earnest money if the deal falls through?

If the deal falls through, what happens to the earnest money depends on the terms of the purchase agreement. In most cases, the seller will keep the earnest money if the buyer backs out for any reason other than a valid contingency. However, if the buyer backs out for a valid reason, they’ll typically be entitled to get their earnest money back.

How much earnest money should I offer?

The amount of earnest money you offer is up to you, but it’s generally a good idea to offer a percentage that’s in line with what’s customary in your market. For example, if 1% is the norm in your area, you might want to offer 1% of the purchase price.

How To Professionally Give the Earnest Money

Earnest money is typically given to a third party, such as a title company, escrow company, or real estate brokerage. This is done to protect both the buyer and the seller. The third party will hold the money in an escrow account until the closing of the sale.

Here are the steps on how to give the earnest money:

  1. Get the earnest money instructions from your real estate Investor. They will tell you who to make the check out to and where to send it.
  2. Make the check out to the specified third party. The check should be made payable to the full name of the third party, not just their initials.
  3. In the memo line of the check, write the purchase agreement number and the amount of the earnest money. This will help to ensure that the money is properly deposited into the escrow account.
  4. Mail or deliver the check to the third party. Be sure to keep a copy of the check for your records.

Once the earnest money is received by the third party, it will be held in the escrow account until the closing of the sale. If the deal falls through, the third party will follow the terms of the purchase agreement to determine who gets the earnest money.

Here are some things to keep in mind when giving earnest money:

  • Never give earnest money directly to the seller. This is not a secure way to handle the money and it could put you at risk.
  • Make sure the check is made out to the correct third party. If you make the check out to the wrong person, it could delay the closing of the sale.
  • In the memo line of the check, be sure to include the purchase agreement number and the amount of the earnest money. This will help to ensure that the money is properly deposited into the escrow account.
  • Keep a copy of the check for your records. This will come in handy if there are any problems with the transaction.

What if I can’t afford earnest money?

If you can’t afford to put down earnest money, you may still be able to buy a home. However, you’ll need to find a seller who’s willing to waive the earnest money requirement. This can be difficult, but it’s not impossible.

Earnest money is an important part of the home-buying process. It shows the seller that you’re serious about buying the property and it helps to protect them in case you back out of the deal. If you’re thinking about buying a home, be sure to understand the basics of earnest money so that you can make an informed decision.

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