Earnest money is a payment made when entering into a real estate transaction

It is usually a good faith deposit made to show the seller that the buyer is serious about following through on the transaction. This deposit is typically held by an escrow company, title company, or the seller's attorney until closing.

The purpose of earnest money is to protect both parties throughout the transaction process. On the buyer’s side, it protects them from a seller that may be trying to back out of the deal. It also serves as their assurance that they can legally pursue the home. On the seller’s end, earnest money gives them assurance that the buyer is serious about buying and will not back out unless they are legally entitled to do so.

When deciding how much earnest money to put down, buyers should consider the amount based on the amount of the purchase price. Generally, most buyers put down between one and three percent of the purchase price as earnest money. However, this amount can vary depending on the market conditions and the type of property being purchased.

When the closing process is complete, the earnest money is typically applied to the buyer’s closing costs. If the deal falls through due to a breach of contract on the seller’s part, the buyer is usually entitled to receive their earnest money back in full. However, if the buyer breaches the contract, the seller is entitled to keep the earnest money as compensation.

In conclusion, earnest money is an important part of the real estate transaction process. It is a good faith deposit used to protect both the buyer and the seller throughout the transaction process. When deciding on an earnest money amount, buyers should consider the purchase price and other market conditions. At the end of the transaction, the earnest money is usually applied to the buyer’s closing costs. If the deal falls through due to a breach of contract, the party with the breached contract is typically entitled to receive the earnest money back in full.

This article was contributed on Jul 16, 2023