Understanding earnest deposits

Composing an offer for a home you are interested in purchasing has many components to be considered. Understanding the purpose of an earnest deposit helps you weight out how you want to utilize the earnest deposit as one spoke in the offer wheel.

Understanding Earnest Deposits. What Is Earnest Money?

​When a buyer and seller enter into a contract, the seller takes the home off the market while the transaction moves through the entire process to closing. Earnest money is an amount of money you put down after getting a home under contract to give the seller them peace of mind to go forward into the next steps of the transaction. It proves you’re sincere—or earnest—about this purchase.. It’s also known as a good faith deposit. Essentially, the buyer is just putting up some of the money earlier in the process.

Buyers stand to lose their earnest money if they jump ship on a real estate transaction. Earnest money gives sellers monetary assurance that a buyer won’t back out of the contract without valid cause.. The deposit is held in an escrow account with the closing company until the deal is complete. If all goes smoothly, the earnest money is applied to the buyer’s down payment or closing costs. If the deal falls through due to a failed home inspection or any other contingencies listed in the contract, the buyer may be able to get the earnest money back. But, 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 to help offset the loss of time on market and other interested buyers.

How Much Earnest Money Is Enough?

The amount of earnest money you should offer depends on the particular real estate market your desired property is in. A languishing real estate listing in a slow market may not need as much earnest money as in a hot market with multiple buyers who are vying for the same property. If you plan to purchase in a neighborhood where cash offers and bidding wars are common, a higher good faith deposit is a good idea.

Can I Get My Earnest Money Back?

Earnest money has contingencies that protect both the seller and buyer in certain situations. When you make an offer on a home and the seller accepts, the sale is only finalized when contingencies, or certain criteria, are met. They’re typically listed in the purchase agreement and cover the inspection and mortgage approval.

How to Protect Your Earnest Deposit

There are a few steps you can take to protect your earnest money:

• Know Your Contingencies - Contingencies protect both the seller and buyer and give both parties the means to back out of the deal. To ensure you meet your side of the contract, make sure you understand your contingencies outlined in your sales agreement and pay close attention to the fine print. You should understand every scenario where you and the seller can back out and what impact that would have on your earnest money. Be sure you’re comfortable with the contingencies and are confident any actions you take won’t result in you losing your good faith deposit.

• Stay On Track With Your Closing Responsibilities - To protect the seller, the purchase agreement will typically include a timeline for when every aspect of the closing has to be met, such as the date by which you need an inspection done or when the mortgage should be approved. If you miss those deadlines, there could be grounds for the seller to back out of the deal with your earnest money in hand. Most sellers won’t rescind the deal the minute you miss a deadline, but if you take too long, it could be a deal breaker.