Understanding Earnest Money
Earnest money can be a practical way to show a seller that you are a serious buyer, committed to buying their home. It is a deposit that you put down at the time of entering into the contract, and gives them confidence that you will go through with the purchase.
• Earnest money is typically returned to the buyer at closing or applied to the purchase price
• Earnest money is not a down payment. A down payment is between the buyer and the lender. Earnest money is between the buyer and seller.
• Too low of an earnest money deposit can make a seller nervous about your commitment to buy their property. Most earnest money deposits fall between 1% and 3% of the purchase price.
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James: Earnest money deposit is significant. I believe it is an indicator about the buyer. It tells you something about the buyer. It tells you about their interest in the property, whether they are wanting to put some skin in the game. Earnest money is normally returned at the closing or applied to the purchase price. It’s not gonna be a huge amount, we’re talking generally I think one percent is reasonable.
Mandy: An earnest money account is an account that we used to let the sellers know that we were serious home buyers. That we wanted this house. So even though it was a pretty low deposit if you ask me.
James: The earnest money deposit is regarding the contract and the transaction between the buyer and the seller, whereas the down payment is between the seller and the lender.
Mandy: The down payment goes towards your house and you purchasing your house, this wasn’t it was completely different.
James: The other day I received a call, from a seller, it was about a three hundred thousand dollar home, and the buyer walked the day before closing, and the earnest money in that case was only five hundred dollars. Nothing compelled him to stay in the deal, losing five hundred dollars is not a big hurt. The earnest money does provide that safety net if you were, cause there’s more risk that we’re gonna lose some serious money. They are less likely to walk away.