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. Buyers usually put it toward closing costs or the down payment. You may have to forfeit the earnest money to the seller if you break the terms of the purchase agreement.
The purchase agreement will include contingencies , which outline the circumstances under which you can walk away from the deal without forfeiting your earnest money. Here are some common contingencies that let you retain your deposit:. Mortgage contingency: You're unable to secure financing. Appraisal contingency: The appraisal comes in lower than the sale price. Inspection contingency: The home inspection uncovers problems. But she is unable to find another place of residence by moving day.
As a result, Tom cancels the transaction and gets his deposit money back. In real estate, earnest money is effectively a deposit to buy a home. Earnest money is deposited to represent good faith in purchasing the home. Earnest money gets returned if something goes awry during the appraisal that was predetermined in the contract. This could include an appraisal price that is lower than the sale price, or if there is a significant flaw with the house.
Importantly, though, earnest money may not be returned if the flaw was not predetermined in the contract or if the buyer decides not to purchase the house during an agreed upon time period. To protect an earnest money deposit, prospective buyers can follow a number of precautionary steps. First, buyers can ensure that contingencies apply to defects, financing, and inspections. This protects the deposit from being forfeited in the case that a major flaw is discovered, or that financing is not secured.
Second, carefully read and follow the terms of the contract. In some cases, the contract will indicate a certain date by which the inspection must be made. To prevent forfeiture, the buyer should abide by these terms accordingly. Finally, ensure the deposit is handled adequately, which means that the buyer should work with a reputable broker, title firm, escrow company, or legal firm. Internal Revenue Service. Purchasing A Home.
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Table of Contents Expand. If a buyer agrees to purchase a home from a seller, both parties sign a deal. The contract may not oblige the buyer to purchase the property, as the property valuation and inspection reports can show the problems related to the house later.
Nonetheless, the contract does mean that the seller takes the house off the market while it is being checked and measured. The buyer makes an earnest deposit of money EMD to prove the buyer's offer to buy the property is made in good faith. Further, the earnest money is not always refundable. For example, if a buyer fails to follow the deadline set out in the contract or if the buyer intends to not to go through the home purchase for contingencies not mentioned in the contract, the seller gets to retain the earnest money.
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