What is ‘earnest money,’ and what role does it play in a deal?
If you have never purchased a home before, you may not be familiar with the term “earnest money.”
A dictionary definition will say that earnest money is a deposit a buyer gives a seller as a show of good faith to buy a home. Why is this necessary?
To better grasp the point of the earnest money, it might make sense to put yourself in the seller’s shoes. Suppose you are selling your home, and you are asking $1 million. If someone offers to buy your home at full price, yippee! Naturally, you will get excited and think it’s a done deal.
But how do we know the buyer is real, and actually has the money to buy your home? After all, anyone can make an offer to buy your home, but you need to know if they are serious or just out shopping around for the fun of it. Yes, people actually do that.
The buyer needs to show proof of funds, or a letter of mortgage pre-approval from a lender. This is the first step to show they are actually capable of buying a house.
As part of the buyer’s offer, they will specify that they intend to make a deposit on the house upon signing of the contract. Typically, the deposit will be 10% of the purchase price. The larger the deposit, the more favorable the offer appears to the seller.
In the case of multiple offers, we may see buyers offer a larger down payment/deposit to make the offer appear stronger. This deposit accompanies a signed contract and is held in an escrow account with the seller’s attorney to prove that the buyer is serious and fully intends on going through with the purchase of the home. Without this deposit, sellers lack confidence that the buyer fully intends to go through with the purchase.
So, the major role that the earnest money plays in a transaction is assuring the seller that the buyer is sincere in their intent to buy the property. It also puts a level of commitment on the buyer, because they will most likely not take this deposit if they are reluctant to go through with the deal; it keeps the seller committed to the buyer.
Halstead Real Estate, Greenwich office, (203) 869-8100 office, (609) 577-0640 cell, email@example.com