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  • Jennifer Stenbak

What is Earnest Money when Buying a Home?

Earnest money is money put down as a good-faith deposit when the potential home buyer presents an offer on a home. This good faith deposit shows the seller that the buyer has an intent to follow through with a purchase. If you’re new to the process of home buying and you haven’t budgeted for an earnest money deposit, then this whole thing may come as a surprise to you.

A lot of things in the home-buying process are designed to make the seller more comfortable with selling their home. Selling a house is a stressful ordeal, and the seller takes on a lot more risk than the home buyer in these situations. Earnest money primarily exists to make the seller more comfortable. It gives the buyer some skin in the game, so to speak. Without earnest money, the buyer could walk away unscathed while the seller could be inconvenienced for several weeks.

Earnest money is particularly important to sellers because if the buyer should decide to pull out of their contract, it gives a seller enough money to put the property back on the market or cover the mortgage and utility payments for the house. Initially, the earnest money isn’t given directly to the seller. It is held in an escrow account until the offer is accepted. When the offer is accepted, the earnest money is usually credited toward the buyer’s closing costs or downpayment.

Earnest money deposits vary, and the typical amount is 1% to 5% of the home’s purchase price, but it isn’t required to put in an offer for a house. Plenty of sellers will accept an offer that doesn’t have an earnest money deposit. However, if the market you are buying in is competitive, offering earnest money may give you a leg up from your competition.

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