What Is the Meaning of Earnest Money?

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Buying a home can be confusing. When beginning the process, a buyer will be required to put down earnest money. However, buyers may be unclear on why the earnest money is needed, what happens to the earnest money and where it goes.

Function

When someone wants to buy a home and is ready to put in an offer on the house, earnest money will be required. This money is meant to show the seller that the buyer is earnest, or serious, about the home purchase.

Time Frame

The earnest money typically must accompany the offer. This money is typically put into an escrow, non-interest-bearing account until closing.

Size

The amount of earnest money required depends on the individual situation. It is usually a percentage of the purchase price, such as 1 percent, or it could be a minimum amount, such as $5000. Certain factors may affect the the amount, such as the age of the house, local market values or whether cash advances to a builder are necessary.

Considerations

Once a buyer closes on the house, the earnest money is typically applied to the down payment. This should be spelled out in the contract.

Misconceptions

Some people mistakenly believe that if they change their mind, or if anything stops the sale, the earnest money is automatically returned. Unless special conditions provide for the return of the earnest money to the prospective buyer, the money will not be returned.

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