What’s the Deal with Earnest Money?

In the real estate industry, there’s one thing it isn’t short on: vocabulary.

If you’re currently in the process of purchasing or selling a home, then you’ve been in the thick of it with learning all new jargon and making sure you understand each step in the process.

Now we’ve got one more to throw at you! But don’t fret – it isn’t anything to be frightened of.

If you’re a buyer, then your agent will at some point bring up “earnest money.” But, what is it?

Earnest money is a type of security deposit that is offered to show the seller you’re totally committed to purchasing the property.

When do you initiate this deposit?

You would pay the earnest money as soon as the seller has accepted your offer on the house. Basically, this deposit is a way to present yourself, as the buyer, acting in “good faith”, and provides the seller with compensation, if for any reason, you back out of the deal.

What happens after you make the earnest money deposit?

The seller’s agent will confirm that your deposit has been secured into escrow, and then the agent will mark the listing as a pending sale. If you’ve agreed to any inspections, appraisals, or any other contingences, you would begin this stage.

How much do you need to contribute towards earnest money?

This all depends – if it’s a seller’s market, a seller might expect more than usual. Typically, earnest money is around 1-3% of the sales price. Before you deposit anything, be sure to discuss options with your real estate agent.

Does the seller just keep the earnest money?

You might be thinking – why would I pay more when it looks like I don’t necessarily need to be making an earnest money deposit? (Which is true, earnest money is not a requirement when you make an offer on a house)

To give you a breather, the earnest money, after it has been deposited to the escrow/title company, and the transaction has closed, can be applied toward your closing costs or down payment. The sellers do not get to keep the earnest money deposit once your sale is finalized.

However, a seller would keep the earnest money if you decide to back out of the deal without a valid reason and/or you back out for a reason not listed as a contingency in the contract, or you do not close in time if the contract has a specific date.

Can you forgo an earnest money deposit?

As stated before – technically, yes! These deposits are not a requirement. However, most sellers will not consider an offer without earnest money.

However, if you’re feeling strained on an upfront payment, you may be able to talk with your agent and the agent’s seller about a workaround.

Make sure you read and review all contingencies, and that you fully understand the finances involved – what you need to pay, how to pay, etc. Work closely with your real estate agent to ensure your finances and decide if an earnest money deposit is right for you.

For more real estate advice, stop by Kittitas Title’s Blog.

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