Earnest money is a deposit that an interested home buyer makes to the seller of a home to show that they are initiating the transaction in good faith. This demonstrates to the seller that the buyer is committed to purchasing, which in turn helps the seller feel comfortable with taking the property “off the market” for the month or longer that it takes for the buyer and seller to work through the purchase process together.
Will I Get It Back?
Unfortunately, if you are not careful, it is possible that you can lose your earnest money and the home you put it up for. Always investigate the property and put your purchase expectations in writing before submitting your offer – this will help make sure that you are going to get your earnest money back if something prevents the sale from “closing”. Be careful not to just take someone’s word (even your agent’s!) – ask to see where the purchase contract provides conditions for the return of your deposit.
The amount of earnest money you include in your offer to purchase varies depending on the market, property type, certain laws, and where you live. Your real estate salesperson will be able to guide you in determining how much would be acceptable.
Is it the same as a “Down Payment”?
Don’t get the earnest money confused with a down payment on the home. When buyers lay out a purchase contract for a home that interests them, that contract is going to specify how much money the buyer is willing to set aside to secure the contract; it’s a demonstration of “good faith” while the purchase process is underway. The “down payment” is negotiated later in the transaction, as part of the financing process, and should not be confused with the earnest money payment.
Earnest money is just you saying to the seller: “I’m interested in the property, and I want you to take me seriously.”
When and to Whom, should I give my Earnest Money to?
The world is full of scams, so be cautious of anyone requesting money as part of a real estate deal – there are very specific legal processes that must be followed in order to keep you protected:
- Don’t just hand the deposit to the seller – ever;
- Make the deposit payable to a trusted third-party, like a well-known legal firm, title company or real estate brokerage;
- Verify that the third party is going to deposit the funds in to a separate trust account;
- Get a receipt for your deposit;
- Until your transaction closes, don’t authorize a release of the earnest money.
An earnest money deposit will show the seller that you are serious about buying the home, and it can provide additional flexibility in the purchase / financing timeline because the seller is confident that you are going to follow through on your intention to fulfill the purchase contract.