One of the terms you may come across in the home buying process is an earnest money deposit. In the home buying process, every dollar you spend is important. You need to know what it all means to ensure that you are making the best investments possible. So, what is earnest money?
Earnest money is usually a small deposit that you put on a home that you want to buy. In short, you are providing a down payment at the time of placing the offer to show the buyer that you are serious about the process. It helps to show the home sellers that you are earnest, which means serious. From the seller's point of view, it is unlikely that any buyer would put earnest money down on multiple homes, though some less-than-ideal borrowers may place numerous offers on homes. Earnest money ensures the seller you are making a true bid on the home because you plan to own it.
What Happens to Earnest Money?
This money will go towards your down payment when you make the home purchase. It may be applied to closing costs. In other words, it does factor into your home's buying process and you are not just handing it over to the home seller. In fact, the home seller isn't likely to see this money. It is placed in an escrow account by your agent's brokerage to provide some level of protection for you and for the seller.
How Much Is an Earnest Deposit?
The amount that you place as the deposit really ranges. If the real estate market is slow, you may only need to place $500 or a few thousand dollars down. However, if there is competition in the marketplace for the home you want, you may need a larger down payment, even up to three percent of the offer you place on the property. Again, this money is applied to your down payment so you are not losing it in the process.
Work with your closing agent to ensure that your earnest money deposit is made properly and applied in the way you would like to do so. It is often a key component of the home buying process, though it can seem strange, silly, or even confusing. Talk to your real estate agent about the most likely level of deposit you will need to make as well, based on market conditions.
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