What is An Earnest Money Deposit?

Written By: Josh Jackson, Local Market Expert

May 27, 2019

Real estate transactions have a lot of moving parts, so it’s easy to miss a detail here and there. One element that many of us tend to forget is the earnest money deposit. Whether you’re a home buyer or seller, here’s what you’ll want to know.

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What is an earnest money deposit?

A home buyer makes an earnest money deposit to a seller in order to show that they’re serious about buying their home. This “good faith deposit” tells the seller that their potential buyer is committed, giving them confidence that the sale will go through.

The buyer typically gives the earnest money when the seller accepts their offer, and they sign the purchase agreement. The deposit is usually held in an escrow account with a third-party title company or escrow company until closing. It can also be handled by the seller’s real estate agent or real estate brokerage.

The buyer should never give the deposit directly to the seller. This precaution ensures that the earnest money goes to the appropriate party according to the details of the purchase contract.

How much is it?

The exact amount of earnest money needed will depend on your market and local custom. In some places, it’s negotiable, while in others, it’s a fixed amount. Generally, the earnest money deposit ranges between 1% to 3% of the home’s purchase price. If the sale goes through, the money will later go towards the buyer’s down payment and closing costs.

When can a buyer lose their earnest money deposit?

There are some instances when a buyer can lose their earnest money deposit. If a buyer fails to meet specific deadlines outlined in the purchase contract, they could forfeit both the deposit and the home.

Or if the buyer has a change of heart and decides against purchasing the home, their earnest money deposit is usually considered non-refundable. In contrast, the earnest money will always be returned to the buyer if a seller decides to end the sale for any reason.

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When can a buyer get their deposit back?

To protect their earnest money deposit in case something goes wrong with the sale, home buyers can also add contingencies to their offer. Contingencies allow a buyer to back out of the purchase contract under specific conditions without losing their earnest money deposit. There are a few different types of contingencies in real estate:

-- A financing contingency, also known as a loan contingency, means that if the buyer has trouble getting a mortgage for the home purchase, they can drop out of the contract with no penalty.

-- A home sale contingency lets existing homeowners make an offer on a new home that’s contingent on selling their old house. That way, they can avoid overlapping housing costs.

-- An inspection contingency gives buyers the ability to negotiate repairs or cancel the contract based on the results of a home inspection.

-- An appraisal contingency states that if the appraised value of the home is lower than the sales price, the buyer can negotiate the purchase price or walk away at no cost.

Tip: In Texas, buyers get an option period of 7-10 days after signing the contract when they can back out of the sale and get their earnest money deposit refunded for any reason.

Are contingencies the best option?

Contingencies help buyers ensure that their earnest money deposit is safe and secure. However, sellers may be reluctant to accept a contingent offer since there’s a chance that the sale will fall through.

So is it possible for buyers to make a competitive, contingent-free offer without the risk of losing their earnest money deposit? For current homeowners looking to buy their next house, Perch’s Buy & Sell service guarantees your home sale. With this certainty, you can make a strong offer on your new house without a home sale contingency

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