Earnest money is a deposit made by a buyer, which indicates the buyer’s serious intent to purchase a property. The deposit is usually 1-2% of the sale price and is held in an escrow account until the sale closes. This deposit assures sellers that buyers are serious and provides some compensation if the buyer withdraws without valid reasons.
The Role of Earnest Money
Earnest money deposits can range from 1-3% of a home’s price, although the amount can be higher in competitive markets or as low as $500-$1000 in areas with low demand. It is important to differentiate earnest money from a down payment, which is cash a buyer pays at closing towards the purchase price.
Earnest money serves as a confirmation of the purchase contract and must be completed by both buyer and seller. Examples of conditions under which earnest money may be returned or kept include securing financing or passing a home inspection. These are known as contingencies.
Contingencies and Closing
- Contingencies may include:
- Financing approval
- Satisfactory home inspection
The handling of the earnest money deposit, whether it goes to the buyer or seller, depends upon whether these contingencies are met. An experienced real estate agent can provide guidance on the appropriate amount of earnest money in various market conditions.
The process of closing a home sale typically takes over a month. During this period, the seller will take the home off the market, relying on the earnest money as an assurance of the buyer’s good faith. Purchase agreements include details on how earnest money deposits are to be handled in the event the deal falls through.