What Does Earnest Money Mean
When a purchase agreement is signed between a buyer and a seller, the buyer is asked for some amount of money to be paid up front. This amount will be placed in a trust account. This deposit is known as “earnest money.”
The actual amount of earnest money is something that the buyer and seller are able to negotiate and may differ from one contract to another. It could amount to 10%
of the purchase price or be as low as $500.
Earnest money amounts can be affected by several conditions:
– More earnest money is requested in a stronger market (Market conditions)
– Less earnest money may be provided by first time buyers (Buyer economics)
– More earnest money may be requested by cynical sellers (Seller psychology)
This particular financial transaction is a confirmation made in “good faith” by the buyer to show that he intends to complete the agreement. How much or little is paid doesn’t matter.
If it should happen that, during the process, the buyer violates the terms of the purchase
agreement or backs out of the deal, the earnest money can be kept by the seller. This does not
occur much because, when the purchase agreement s are written , there are “escapes” for the
buyer, called “contingencies” written into the original agreement.
There are traditional contingencies that include passing a home inspection, buyer receiving a clear title, and buyer financing confirmed by a certain date.
If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.
When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer’s bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.
There is considerable variation among different parts of the country, within states, cities and
local neighborhoods. Please consult your real estate attorney or your agent before signing
a purchase agreement. You don’t want to lose your earnest money.