Explaining the Earnest Money Deposit

An “earnest money deposit” is one of the terms agents casually toss about but one that not everybody fully understands. It’s basically a case of “putting your money where your mouth is” to show your offer is genuine and made in good faith.

A prospective home buyer will traditionally accompany their offer with a check for a small sum. This “earnest money deposit” will usually be a small percentage of the purchase price (around 1 to 2%) and can vary according to each state.

Should the property be exceptionally “hot” and generating a lot of interest, the buyer may increase the deposit to prove to the seller that they mean business. If the property market is booming (aka a “hot” market), deposits will typically be higher overall than when the market is slow.

A check for an “earnest money deposit” should not be made out to the seller but is held by the escrow company. By effectively placing the money in a “trust” account, it belongs equally to both the buyer and seller in the event that the deal fails for a reason that is invalid under the purchase contract.

If the purchase is straightforward and goes ahead as planned, the earnest money is usually applied toward the down payment and closing costs. Most deals close without a hitch but there are always exceptions.

Both buyer and seller have been known to assume that if the deal falls through, they will automatically get the money. This is a serious misconception. Often there will be cancellation fees which will have to be paid out of the deposit. And, because the deposit is held in trust, the law in most states stipulates both the buyer and seller must agree on the dispersal of the money.

Serious disputes don’t often occur; they are the exception, not the rule. A qualified professional real estate agent will have the experience and expertise to negotiate these challenges.

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