This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money. Earnest money is a good-faith deposit you make on a home to show the seller you're serious about buying. The money is deposited after the seller has accepted your offer and is usually kept in an escrow account. When the sale closes, you can keep the cash or apply the money toward the purchase.
Although it's not required, be prepared to offer earnest money when shopping for a house, especially in a tight housing market. Otherwise you'll have a hard time competing against other buyers. But that number varies depending on the local real estate market. Sellers are more likely to expect higher amounts in a hot market — when there are more buyers than homes for sale. Talk to your real estate agent about how much earnest money to offer.
After accepting an offer, the seller takes the home off the market until the sale closes, which can take several weeks. The earnest money helps assure the seller that a buyer is acting in good faith, and it provides them with some compensation if the buyer backs out of the deal without a valid reason.
Your purchase agreement will spell out how the earnest money deposit is handled. Typically the money is kept in an escrow account held by an escrow company, a real estate title company or the seller's real estate agency. The earnest money is disbursed at closing. Therefore, it is extremely important for the home buyer to make sure all the circumstances that may require the cancellation of the contract and refund of earnest money are written into the contract as contingencies.
A new construction home purchase agreement will contain fewer contingencies, but the buyer can still be reimbursed for the earnest money deposit in case of a denial of financing within the specified time frame. The two terms are often confused. They are not the same but are closely related. The earnest money deposit can be viewed as part of the down payment. While an earnest money deposit functions as a promise to the seller, a down payment is a promise to the lender providing your mortgage loan.
The earnest money deposit is never given to the seller directly. It is usually put in an escrow account by a third party, such as the title company, and held until the closing date.
At the closing the earnest money is applied toward the down payment or closing costs. Down payment is the cash payment the buyer puts down on the home purchase. The rest of the purchase price is usually financed, unless the buyer makes an all-cash purchase, in which case the balance is paid at closing by a certified check or wire transfer.
One should keep in mind, however, that the down payment is not the only cash required to purchase a home. Buyers also need to plan on having cash to cover extra expenses such as an appraisal, title search, potentially an independent inspection, and all or part of the closing costs. The down payment is paid directly to the seller as part of the money disbursement process at the closing.
The remainder of the purchase price is paid to the seller by the mortgage company and assumed as a mortgage loan by the buyer. Whatever your stage in life — whether you are a first-time home-buyer, a growing family realizing your dreams, or an active adult seeking a resort at home lifestyle — we have the home that is right for you. Visit khov. Follow us:. What Is Earnest Money? Is Earnest Money Refundable? Those usually include: Issues found during the inspection of the house: As a buyer you have the choice of canceling the contract and receiving your earnest money back if the issue is a deal breaker for you; asking the seller to rectify the issue within a set amount of time; or asking for a concession to compensate you for the problem.
All of this will need to be documented with the lender, however. This is likely most successful when the real estate market is slow and the seller is in a hurry to make a deal. Most buyers want to provide as much of a down payment as possible to avoid mortgage insurance , lower their monthly payments and possibly get a better interest rate, which is why it makes sense to direct the lender to add the earnest money amount to the down payment at closing.
Bob Musinski has written about a variety of financial-related topics — including personal and business loans, credit cards and personal credit — for publications such as U. News and World Report. He has worked as an editor and reporter for multiple publications and an international wire service.
You can follow him on twitter bobmusing. Select Region. United States. United Kingdom. Bob Musinski. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. How Earnest Money Refunds Work A home purchase can fall through for many reasons, such as structural problems in the home, a low appraisal value or a financial issue that prevents the buyer from closing on the mortgage.
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