In a real estate transaction, earnest money is a deposit made by a buyer to show they are serious about purchasing a property. It’s also often called a “good faith” deposit and serves as a sign of the buyer’s commitment to the deal. Earnest money protects the seller and shows the buyer is serious, making it a key part of most real estate transactions.
The amount of earnest money is usually between 1% and 2% of the home’s purchase price, but it can vary depending on the local market and the terms of the agreement. After the buyer and seller sign a purchase agreement, the earnest money is typically held in an account by the seller’s firm, but can sometimes also be held by the seller’s title company.
If the sale goes through, the earnest money is applied toward the buyer’s down payment or closing costs. If the deal falls through because of a valid reason outlined in the contract, like issues with financing or a failed home inspection, the buyer can usually get the money back. However, if the buyer backs out for a reason not covered in the contract, they may lose the deposit. In either situation if the buyer or seller backs out of the deal for any reason there is a negotiation to see what happens with the earnest money. It may all be returned to the buyer, it may all remain with the seller, or it may be split between the two.