Earnest Money…what is it, and why.
Lydia Taylor February 19th, 2008
Many first time home buyers are confused about what earnest money is and why they should offer it when they attempt to purchase a home. Earnest money is a deposit given from the buyer to the seller, as ‘evidence of good faith’ in purchasing real estate. This shows the buyer’s commitment to the property considered for purchase, and that the buyer is truly interested in the property. It also gives the seller incentive to pull their property off of the market for someone that is serious.
I like to put buyers in sellers shoes. If you were selling your home and someone asked you to take your home off the market for 20-60 days, wouldn’t you want money in place in case the buyer backs out for no reason? There would be no repercussions on the buyer for doing so! When earnest money changes hands, the buyer has invested money in the transaction and insures they want it to continue to a successful conclusion.
Do not worry- if you have a reason within the contract to back out, you will get your earnest money back. On the other hand, if the deal works out successfully, on the day you close on the home the earnest money is applied to your down payment or closing costs. So you can plan on having your earnest money applied toward your real estate purchase.
- Real Estate Terms
- Comments(5)
Good post here, I always advise clients to use earnest money, and a large amount if possible. This is especially true if our offer is low. If a good size deposit is strapped to an offer, some people be more likely to accept.
I also always try to have buyers put down as much earnest money as possible. Some people come along thinking that putting $1,000 on a 600K home is fine, but I disagree, when you are talking that kind of purchase price $1,000 is nothing these days.
Jim,
I totally agree with you because when you are talking about that kind of money, the seller needs to see that check, and say “Ok, this guy is serious lets talk”. Instead of them saying, “$1,000? Thats pocket change, lets see what else is out there”.
In Massachusetts things are done a little bit differently than many other parts of the country. We have a two stage agreement where an offer is written and typically you will get either $500 or $1000 as earnest money. After the offer, home inspections are completed and then the buyer and seller sign a purchase and sale agreement. The typical down payment is at this point is 5%. It makes perfect sense that a seller should have some kind of protection is case the sale does not occur.
I noticed that you placed a “no follow” on Benjamin’s comment but not on Jim’s - why is that?
Bill- You have to leave 3 approved comments before the no-follow tag is removed on comments. Please make sure you use your real name as well - I don’t approve links instead of names. Thanks for stopping by!