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What is Earnest Money?

What is Earnest Money?

Earnest money is “putting your money where your mouth is”. When an offer is made to a seller on behalf of the buyer, something more than a buyer’s word that they are interested in the property is usually required. This shows the seller that you are a solid buyer who is serious about the offer that is being placed on the table. The higher the amount of the earnest money will show the seller that you are indeed “earnest” about the purchase of the home.

Deciding how much money to place in earnest is not a cut and dry answer for any one. This is where a real estate professional can step in and really assist you in making decisions because every offer is unique. A guideline to follow is one to five percent of the offer price.

The real estate professional will take your earnest money check with them when they make the offer. The offer specifically states the amount of the earnest money and the check is legally considered part of the offer. Once an offer is accepted the check is deposited into a trust account, usually held by a title company or real estate lawyer. It is always a third party. The reason for this is to limit access to the money by both the buyer and the seller. At closing this money will be transferred and applied either to the escrow, down payment or towards the closing cost.

If for any reason the offer does not go through, who gets the money? Although each situation is different, generally speaking, if for any reason you as the buyer back out of the deal, the seller could get the earnest money. If it is the seller that backs out of the deal, generally the buyer is returned the earnest money. Every real estate transaction and deal is unique, if you have questions regarding your earnest money - ask your real estate professional before you sign the check.

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