What is earnest money used for

This could include an appraisal price that is lower than the sale price, or if there is a significant flaw with the house. Importantly, though, earnest money may not be returned if the flaw was not predetermined in the contract or if the buyer decides not to purchase the house during an agreed upon time period. To protect an earnest money deposit, prospective buyers can follow a number of precautionary steps.

First, buyers can ensure that contingencies apply to defects, financing, and inspections. This protects the deposit from being forfeited in the case that a major flaw is discovered, or that financing is not secured.

Second, carefully read and follow the terms of the contract. In some cases, the contract will indicate a certain date by which the inspection must be made. To prevent forfeiture, the buyer should abide by these terms accordingly.

Finally, ensure the deposit is handled adequately, which means that the buyer should work with a reputable broker, title firm, escrow company, or legal firm. Internal Revenue Service. Purchasing A Home. Real Estate Investing. Your Privacy Rights.

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Your Practice. Popular Courses. Alternative Investments Real Estate Investing. Table of Contents Expand. What Is Earnest Money? Understanding Earnest Money. Example of Earnest Money. Does Earnest Money Get Returned? Key Takeaways Earnest money is essentially a deposit a buyer makes on a home they want to purchase. A contract is written up during the exchange of the earnest money that outlines the conditions for refunding the amount.

Earnest money is always returned to the buyer if the seller terminates the deal. Prospective buyers forfeit their earnest money if they decide to back out of a purchase. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Related Terms Good Faith Money Good faith money is a deposit of money into an account by a buyer to show that they have the intention of completing a deal. Closing Costs Closing costs are the expenses, beyond the property itself, that buyers and sellers incur to finalize a real estate transaction.

What Is an Account in Trust? An account in trust is a type of financial account opened by one person for the benefit of another. How Escrow Protects Parties in Financial Transactions Escrow broadly refers to a third party that holds money or an asset on behalf of the other two parties in a transaction. Retract Definition A retract is the withdrawal of a bid, offer, or statement before any relevant party acts on the information provided.

Update your browser. It appears your web browser is not using JavaScript. Without it, some pages won't work properly. Please adjust the settings in your browser to make sure JavaScript is turned on. When you find a home and enter into a purchase contract, the seller may withdraw the house from the market. Earnest money, or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home.

In most cases, earnest money acts as a deposit on the property you're looking to buy. You deliver the amount when signing the purchase agreement or the sales contract. It can also be part of the offer.

The seller and buyer sign a contract that defines the conditions of refunding earnest money. When buying a property with high demand, a considerable deposit can compel the seller to select your offer over others. You may also get more favorable contract terms. Parties in a home sale can agree to apply earnest money to the buyer's down payment or closing costs.

In such a case, you're putting up some amount for the home in advance. The amount of earnest money you offer varies based on the market and the condition of the house. If you want a home in a location prone to bidding wars and cash offers, you may have to offer a considerable amount. A lower earnest money deposit may be suitable for a fixer-upper in a slow market.

The best way to determine a reasonable earnest money amount is to talk to an experienced real estate agent. While losing your good faith deposit is unlikely, offer an amount that the seller will appreciate without exposing yourself to financial risk.

Typically, you pay earnest money to an escrow account or trust under a third-party like a legal firm, real estate broker or title company.

Acceptable payment methods include personal check, certified check and wire transfer. The funds remain in the trust or escrow account until closing.

That's when they get applied to the buyer's down payment or closing costs. Alternatively, you can receive your earnest money back after closing. Contrary to popular belief, homebuyers don't always forfeit their earnest money to the seller if a deal fails. The buyer gets their good faith deposit back if r the seller terminates the home sale without a valid reason.

You may also reclaim your money if the reason for contract cancellation is a contingency outlined in your purchase contract. Examples of known real estate deal breakers include:. There are times when homebuyers lose their earnest money after a broken deal.

Two scenarios that may lead to the forfeiture of your good faith deposit are:. Property buyers get their earnest money back if the deal goes south for reasons covered in contingencies. If you change your mind late in the buying process for reasons other than contingencies, the seller can keep the earnest deposit. It compensates them for the time, money and effort required to list the property again and obtain another buyer. Take the following measures to protect your earnest money from fraud or unjustifiable forfeiture:.

Buying a home is a big purchase. You want to make the best offer and protect yourself in the process. Earnest money allows you to communicate your seriousness and ensure your seller is committed. Please review its terms, privacy and security policies to see how they apply to you. Skip to main content Please update your browser. Please update your browser. Credit Cards. Checking Accounts. Savings Accounts.