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What is Earnest Money?
As with any endeavor, money talks when buying a house. Your earnest money deposit tells the seller that you are serious.
When you submit a written offer to a seller, you generally are required to include a deposit in the form of a personal check, cashier’s check or cash. That deposit is called "earnest money" and it signifies to the seller that you are ready and willing to purchase his or her home. A real estate transaction is not valid without some sort of consideration.
How much earnest money should I give the seller?
A good rule of thumb is 1% of the offered price, but the custom may differ in your part of the country, so consult with your agent. Especially in multiple offers, it is wise to deposit as much as you are comfortable with, as this may be a determining factor in whether you get the home or not.
The listing broker will hold your money in a special trust account until the transaction closes, at which time it will be applied to your down payment. If the seller doesn’t accept your offer or if some condition of the contract is not satisfied, the listing broker will refund your money.
One word of caution: if you have a meeting of the minds with the seller and enter into a binding contract, you will be required to perform. Should you decide to walk away, you will lose your earnest money and perhaps worse...
What if I decide not to go through with the sale?
Earnest money, as stated above, is deposited into a trust account. The money cannot be released until one of two things happens: 1) Closing of the sale; or 2) A cancellation of the purchase agreement by both parties. If you back out of the purchase agreement based on a valid contingency, you are most likely entitled to a refund of your earnest money. However, keep in mind that it cannot be released until the Seller signs the cancellation as well, or until the proper legal action is taken. While you may be legally entitled to your earnest money, the reality is that it could be tied up until the Seller signs a cancellation or another agreement is reached. The good news: The Seller cannot enter into another valid purchase agreement without a cloud on their title until the agreement with you is cancelled. So there is motivation for them to bring the transaction to a close as well.
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