If you are someone who recently decided to purchase a house or property, then we are sure you must have heard your real estate agent repeat the term ‘earnest money’ over and over again. Well, if you were confused about what he meant but did not ask him, thinking that you would later Google it at home, then congratulations, you have landed on the right page. Hop on below to learn everything about earnest money and the critical role it plays in the world of real estate.

What is Earnest Money?

Earnest Money is a deposit amount that anyone interested in buying a home will have to show or put down to their real estate agent or home seller. Many people might be confused about whether it is a legal rule or a requirement to show the money. Well, the answer is no.

Pledging your earnest money when you are interested in purchasing a home or property is not a legal requirement; it is, in fact, more of a standard practice. It shows the seller that you are interested in purchasing their property as long as it fits your demands and doesn’t show anything wrong.

This also assures the seller that the buyer will not back off at the last minute or make offers on multiple properties, as they would not have anything to lose if the earnest money is not paid. You can also consider this money as a pre-installment when it comes to purchasing homes – however, it is not a downpayment.

How Much Earnest Money Should You Put Down?

Now that you understand what earnest money is, the question is how much someone interested in purchasing a property should pay to the seller. Well, according to the standard practice and general rule of thumb applied globally, the earnest money put down for a house purchase is around 1-3% of the property price, which both the seller and purchaser have agreed upon. For new properties, it might even rise to 10%

However, this is not always the case. In some markets, sellers operate on a fixed amount of earnest money, which typically ranges from $1000 to $3000. The price also significantly differs based on the area in which you might be purchasing the property. For example, high posh areas like Silicon Valley may have six-figure earnest money deposits, while lower middle-range areas may operate on more standard amounts.

This highlights the fact that the earnest amount is not fixed and can differ based on a few different factors. Hence, it is always essential to talk to your real estate agent about how much earnest money they would be expecting you to put down or what the rules are in the area where you are purchasing property.

Is Earnest Money Refundable?

Upon reading about the earnest money, you might be thinking that once the money is paid and the deal fails, would you be getting the money back or not? Well, we understand your concern and would like to make it clear that you, as a homebuyer, will not permanently forfeit your earnest money to the seller if the deal fails midway. So, yes! You, as a home buyer, will get your paid deposit (earnest money) back if the deal for the home sale is terminated without a valid reason.

Homebuyers may also get their money if the reason for the contract cancellation is contingency, which was already outlined on the purchase contract if one had been made. A few examples of these real estate deal breakers that may lead you to ask for your earnest money back are:

• If the home purchaser finds any defect upon the final inspection of the house or property.
• It may also be a deal breaker if the appraisal amount happens to be lower than the overall home sale price, and the seller is not willing to re-negotiate the price.
• If you, as a buyer, are unable to sell your current home before closing the deal on the new one, then it might become a deal breaker, too.
• When the homebuyer can’t secure financing.

While all the above factors will get you your earnest money back, there can be times when the home buyer can also lose their earnest amount. Hence, it is essential to make sure your agent writes your contract down correctly so that you can get your money back if something goes wrong.

When Does Someone Lose Their Earnest Money?

While the majority of scenarios, if listed down on your contract, can get you your money back, there are times when you may lose your earnest money, too. Here are two scenarios which may lead to the forfeiture of your earnest money:

Waiving your Contingencies

If you have the financing and inspection contingencies listed in your contract, then you can save your earnest money if the mortgage doesn’t go through or if the house is being repaired. However, if you, as a home buyer, waive either of these two contingencies, you will not get the earnest money that you deposited back in case the house doesn’t make it through the sale.

Ignoring Contract Timelines

Like all other selling aspects, home purchases also come with a scheduled timeline on the contract, without which the buyer should complete the purchase process. Failure to do so on the agreed dates would indirectly mean a breach of contract, which can lead to failure to fulfill the deal and your losing your earnest amount.

Wrapping Up!

When purchasing properties, any individual or home buyer needs to have a clear understanding of all the terms, which are essential to gain a better understanding of what you are getting yourself into. The term ‘earnest money’ falls into the same tangent, and we hope this article was helpful enough for you to gain a better understanding of it.