What is an Earnest Money Deposit?
An earnest money deposit is shown to the seller of the home from the buyer as a way to ensure the seller knows the buyer is serious about wanting and purchasing the property. It's a "good faith" deposit, where the seller can see the potential buyer is interested in the property enough to begin paying money.
Still a bit confused? This is where it's easier to think of an earnest money deposit like a marriage proposal. With a marriage proposal, the offer of marriage can be accepted or rejected. If the offer is accepted, you're not married yet, you're just engaged, and it's customary to give an engagement ring. With a home offer, the seller can accept or reject the offer letter. If they accept the offer, you're now under contract on a home!
Why is an Earnest Money Deposit Customary?
The deposit is helpful to build trust with the seller. If you're serious about wanting the home, then you know that you're going to be paying money for it eventually. A serious buyer won't be too concerned about starting to pay for the home. If you're not serious about the home, and may want to make some offers on other homes, you'll be more concerned about investing money into an offer. It dissuades serious buyers from hesitant ones.
It's a good way to make sure a buyer isn't making offers on homes left and right. As we'll discuss below, if the deal falls through because the buyer decides they don't want the home, the seller will get the money. This ensures that buyers only make offers on homes in which they're really interested. Just like when you're engaged, you don't propose to other people, you don't make offers on other homes when you're under contract for one.
What happens to the earnest money deposit once an offer is made?
If an offer is made, and the sellers do not accept it, the money is given back to the buyers and they go on to use it with a different home purchase.If the offer is made on a home and it is accepted, (or the seller counter offers and an agreement is made), the earnest money deposit is put into escrow. This doesn't mean that the seller can cash it or use it. Escrow is a third-party group that keeps the money in an account until it's time to use it for the home. They're impartial and can give the money back if the deal falls through. If the deal goes through, the earnest money deposit is usually put toward the down payment of the house. The earnest money deposit will be given to the buyer or the seller depending on why the deal falls through.
If the buyer decides that they're not interested, or otherwise pulls out from the deal because of something that was not stipulated as a valid reason in the contract, the money will go to the seller. The seller can use this money to put the home back on the market.
If the deal falls through because of something that has happened with the seller (like they decide they don't want to move, or the reason they were moving "“ i.e. a job "“ falls through) the money will go back to the buyer. If the deal falls through because of something in the contract, the buyer also receives the money back. If the systems and appliances are not in working condition, or a home inspection finds too many repairs needed, the buyer can drop out of the deal and still receive the money back.
If everything goes well, during closing, the check will be turned over to the seller and will be a part of the deposit on the home.
Buying a home? Make sure to purchase a home warranty to protect the systems and appliances in the house, or ask your seller to include one in the purchase. You can compare plans and pricing here. Selling a home? Get free listing coverage to cover the home while it's on the market, and easily move it to a full home warranty plan.
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