Real Estate
Earnest Money
Earnest money is a deposit made by a buyer to demonstrate serious intent to purchase a property, typically held in escrow until closing.
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Exam Tip
Earnest money shows good faith. Contingencies protect buyer's deposit.
What is Earnest Money?
Earnest money (also called a good faith deposit) is money a buyer puts down to show they're serious about purchasing a property. It demonstrates commitment and is applied toward the purchase at closing.
Key Facts
| Aspect | Details |
|---|---|
| Typical Amount | 1-3% of purchase price |
| When Paid | With offer or shortly after acceptance |
| Held By | Escrow agent, title company, or broker |
| At Closing | Applied to down payment or closing costs |
What Happens to Earnest Money
| Scenario | Outcome |
|---|---|
| Deal closes | Applied to buyer's costs |
| Buyer backs out (with contingency) | Returned to buyer |
| Buyer backs out (no contingency) | May be forfeited to seller |
| Seller backs out | Returned to buyer |
Common Contingencies That Protect Earnest Money
- Financing contingency - If buyer can't get mortgage
- Inspection contingency - If major issues found
- Appraisal contingency - If home appraises low
- Sale contingency - If buyer must sell current home
Tips
- Get contingencies in writing
- Understand deadlines for each contingency
- Know when earnest money becomes non-refundable
- Use reputable escrow holder
Study This Term In
Related Terms
Escrow
Real EstateEscrow is a neutral third-party arrangement where money or documents are held until all conditions of a real estate transaction are met.
Closing (Real Estate)
Real EstateClosing is the final step in a real estate transaction where ownership transfers from seller to buyer, documents are signed, funds are exchanged, and the deed is recorded.