Definition Of Earnest Money In Real Estate

When a seller and buyer agree to a purchase agreement for a home sale, the buyer is requested to place some small amount of money into a trust account.
Such a front end deposit is referred to as “earnest money.”

A sales contract’s earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

*Seller psychology: an uncertain seller may request more earnest money
*Market conditions: a stronger market may result in more earnest money
*Buyer economics: first time buyers may be asked for less earnest money

It really doesn’t matter how much or how little earnest money is provided. This fund transfer is
a “good faith” action to confirm that the buyer wants to complete the home purchase.

At some time during the process, if it should happen that the buyer doesn’t follow through to complete the sale, he will likely have to lose the earnest money paid.
It is not something that happens often because there are “outs” written into the agreement called “contingencies.”

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

Earnest money will be returned to the buyer if any of the above contingencies cannot
be met. Such failure with regard to the contingencies will void the contract.

If the contingencies are me, the earnest money then becomes a deposit to be applied
To the buyer’s financial responsibilities when the sale is settled. For instance, if a buyer is
required to have $60,000 at the time the sale is scheduled for closing, the actual amount
the buyer presents will b e $60,000 minus the earnest money.

You will want to make sure your earnest money is saved. Speak to your real estate agent/attorney before signing any purchase agreement. They can help you understand
the variations in earnest money among states, cities, and towns.