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Why is Earnest Money Important?

The meaning of earnest money is in the name — it’s a deposit of good faith the buyer to seller. Providing an Earnest money deposit shows the seller you’re a serious contender, and it helps your offer get the attention it deserves. Most sellers will not consider an offer it isn’t accompanied by an earnest money deposit offer.  A solid contract supplemented with an earnest money deposit shows a seller that you have both the resources and the desire to seal the deal. Including a considerable deposit could even help your offer be selected over others.  The best way to start any relationship is with a showing of good will. An ample deposit serves this purpose, and places buyers in a great position to obtain better negotiating ground.  It is important to note that buyers stand to lose their earnest money if they jump ship on a real estate transaction without cause as outlined in the real estate contract. Earnest money gives sellers financial surety that a buyer won’t back out of the contract without valid cause.  Most contracts have contingencies that allow buyers to walk away from a home. Two examples are if the house can’t pass inspection or the buyer can’t qualify for financing. However, if a buyer decides to cancel the contract for a reason not covered by a contract contingency, earnest money is generally forfeited to the seller.

Earnest money amount will vary according to your area, seller and price of home you’re considering. The best way to determine local customs is to talk to an experienced real estate agent. Your earnest money deposit could range anywhere from a few hundred dollars to a few thousand. So much depends on the specific property, the competitiveness of the market and other market-specific factors that an everyday person doesn’t have a pulse on.  A competitive market might mean you’ll need to put down more money. Most agents agree, buyers should include an earnest money amount that will be taken seriously, but not so much that a buyer’s finances are at risk. It’s unlikely that you’ll lose your earnest money deposit, but it’s important to protect yourself too.

Earnest money is held by a third-party in Escrow. Giving money directly to the seller is not a good idea. If the transaction doesn’t close and the seller cannot return the money, you may have to pursue legal action, costing you more. Giving the money to a third party protects the buyer from questionable sellers and the sellers from questionable buyers.  Earnest money is released by mutual consent, however each state has very strict rules on how this deposit is managed until the transaction closes. Generally, these funds are held in an escrow account until closing, where funds are applied towards your closing costs. 

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