When a seller and buyer agree to a purchase agreement for a home sale, the buyer is requested to place some small amount of money into a trust account.
Such a front end deposit is referred to as “earnest money.”
A sales contract’s earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.
Factors influencing amounts of earnest money:
*Seller psychology: an uncertain seller may request more earnest money
*Market conditions: a stronger market may result in more earnest money
*Buyer economics: first time buyers may be asked for less earnest money
This particular financial transaction is a confirmation made in “good faith” by the buyer to show that he intends to complete the agreement. How much or little is paid doesn’t matter.
If it should happen that, during the process, the buyer violates the terms of the purchase
agreement or backs out of the deal, the earnest money can be kept by the seller. This does not
occur much because, when the purchase agreement s are written , there are “escapes” for the
buyer, called “contingencies” written into the original agreement.
There are traditional contingencies that include passing a home inspection, buyer receiving a clear title, and buyer financing confirmed by a certain date.
In the case that any of the contingencies are not met, the purchase agreement will be void and the buyer will have earnest money returned to him.
When the contingencies are met, the earnest money is applied to the amount that the buyer will be responsible to provide at settlement. For example, if the buyer
owes $55,000 at closing, the amount will be $55,000 less the earnest money.
Earnest money customs vary from state to state, city to city, and even locale to locale. Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts. The earnest money you save may be your own.