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What Does Earnest Money Mean

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account. This up-front deposit is more commonly known as “earnest money”.

A sales contract’s earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Earnest money amounts can be affected by several conditions:

*Seller psychology: an uncertain seller may request more earnest money
*Market conditions: a stronger market may result in more earnest money
*Buyer economics: first time buyers may be asked for less earnest money

It really doesn’t matter how much or how little earnest money is provided. This fund transfer is
a “good faith” action to confirm that the buyer wants to complete the home purchase.

If it should happen that, during the process, the buyer violates the terms of the purchase
agreement or backs out of the deal, the earnest money can be kept by the seller. This does not
occur much because, when the purchase agreement s are written , there are “escapes” for the
buyer, called “contingencies” written into the original agreement.

Some of the usual contingencies may be that the buyer must have financing by a certain date;
the seller must give the buyer a clean title, and, prior to completion of the sale, the home needs
to pass a home inspection.

In the case that any of the contingencies are not met, the purchase agreement will be void and the buyer will have earnest money returned to him.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer’s bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

You will want to make sure your earnest money is saved. Speak to your real estate agent/attorney before signing any purchase agreement. They can help you understand
the variations in earnest money among states, cities, and towns.

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