Home Financing Lingo: What is Earnest Money?

Has your realtor or lender talked to you about your home finance and mentioned the term “earnest money?” This may be one of those terms tossed around that you’ve never heard of, which can make you feel less educated about your own home financing experience.

You’ve found the perfect house and it’s time to put down an offer, but someone will tell you that you’re going to need to make an earnest money deposit, and you may not be sure what that means. Take a look at this guide explaining what earnest money means in the real estate world, and how it will apply to you.

What is earnest money?

Making an earnest money deposit is just like making a “good faith deposit” in real estate. It’s the money you would pay within a couple of days after your offer was accepted by the seller. You would need to put down between 1-3% of the sale price of the home after the seller accepted your offer, although in some areas it’s a fixed amount.

You can pay this by a wire transfer, a cashier’s check, or a personal check, which will be deposited into the escrow account, to the listing agent, to the title company, or to the broker. Don’t worry, because this money will count towards your closing costs later.

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Is this legal and what about disputes?

It’s not a legal requirement of buying a home, but it does often prevent a buyer from changing their mind after the verbal agreement. It’s easy to get buyer’s remorse at the beginning of the process, but when money has been put down, it’s easier to be put at ease on your end and to put the seller at ease about agreeing to sell to you.

If a dispute comes up where the deposit is being held in escrow, you’ll want to talk to your agent about how to handle these types of disputes. Often times you’d need to go to small claims court to resolve the disputes, but that itself isn’t always worth it with the high price to do so.

What about new construction or the need to forfeit it?

In the case that you are buying a new construction home, you’ll actually end up paying a much higher percentage for the earnest deposit. You could pay as high as 50% of the purchase price to the developer, but this is because they may be fronting the construction costs from the bank themselves and will have to prove the unit is sold to a qualified buyer. It’s too easy for a buyer to walk away in this scenario despite this being built to their specific tastes, which makes the 50% earnest deposit so important to a developer.

If you’ve placed an earnest money deposit and feel the need to get out of the deal, you may be wondering if it’s possible to get it back. Backing out of the agreement for reasons that are different from your contingencies will result in losing your deposit, or at least a cancellation fee, but it may be in your best interest to stop the deal from going through. This money would likely cover the seller’s lost time in selling to someone else, or money spent on renting another place and storing their items for your upcoming move into the house. Whoever holds the deposit will determine if you should get it back.

Sometimes real estate lingo gets thrown around that you just don’t understand. This is a look at what earnest money means and why you’ll need to provide it before close.