May 25, 17 • Real Estate

Understanding Earnest Money

Especially if you’re a first-time homebuyer, earnest money can be a little confusing. You probably didn’t think you’d have to pay anything until actually purchasing the home!

What is earnest money?

Earnest money is, in short, just a way for a homebuyer to show the seller that he or she is serious about and committed to buying the home. If you’re a buyer and you put an offer down on a home, you need to then “put your money where your mouth is” to show that you’re serious about the deal. The process of buying/selling a home takes about a month at least, so the seller wants to be sure that the buyer is serious and won’t back out of the deal half way through.

Typically, earnest money goes into an escrow account. It stays there until closing day, when it gets added to the buyer’s down payment. If the buyer backs out of the deal, the seller will usually get to keep the earnest money as payment for having to keep their home off the market during the weeks the buyer “wasted” by putting down an offer, then backing out.

How much will I have to pay for earnest money?

The answer to this question depends on a couple different factors. The amount is often a percentage of the offer amount, so the more the home costs, the more earnest money you’ll have to put down. It’s usually only 1% to 2% of the offer amount, although it can be higher, particularly if the house is in a hot seller’s market.

For instance, if a seller receives many great offers on their home, he or she may ask for a higher percentage, because accepting your offer is riskier for him, because he’s declining several good offers to go with yours.

In a market that’s not as hot, though, and a seller is anxious to sell, you may only have to put down $500 to $1,000 in earnest money.

Where does the earnest money go until we close on the house?

The deposit will usually go to the title company. The title company makes sure the title to the home is legitimate and clean, and they act as a third party for documents and earnest money deposits.

During closing, the deposit will go toward your down payment on the home.

What do I do if I need help with earnest money?

Although earnest money is a fairly simple process, things do occasionally happen to complicate it. If a buyer or seller backs out and earnest money needs to be repaid or collected, there can be disagreements that need to be settled.

If you need help with earnest money, contact The Farah Law Firm now!

Michael Farah

About Michael Farah

Michael Farah is the founder and managing attorney of the Farah Law Firm. Mike graduated from the University of New Hampshire School of Law and is licensed to practice law in Texas and New York.

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